Axiata Bhd
(Jan 12, RM7.05)
Reiterate buy with unchanged target price of RM7.59: Axiata’s 91.59%-owned Bangladeshi operating company, joint venture with NTT DoCoMo, Robi Axiata Ltd is slated for initial public offering (IPO) in 2016.

This corporate exercise will have a higher priority than tower listing, which requires more time for profitability and efficiency improvements as well as regulatory clearances.

Robi is Axiata’s fourth largest contributor, with 11% of sales, 11% of earnings before interest, taxes and amortisation and 7.3% of profit after tax and minority interest as at the first nine months of 2014. Relatively small contributions, but improved tremendously since 2010 with great potential to grow further.

In Bangladesh, mobility is still at the infancy stage, dominated by prepaid voice and short message service. As at November 2014, mobile and data penetration rates stood at circa 72% and about 25% on the back of 166 million population with both three-year compound annual growth rates projected at 12% and 19.2%, respectively.

With circa 25% revenue market share (RMS), Robi is the second largest telco behind Grameenphone (GP) with about 52%. In terms of subscribers, Robi ranks third with circa 21% behind GP (about 42%) and Bangalink (about 26%). With 96% population coverage, its strongholds are Chittagong, Dhaka and Comilla (CDC). Data only contributes 5% of its total sales while smartphone penetration remains low at 5%.

Robi has a high tax regime of about 50%, including subscriber identity module (SIM) taxes, new and replacement; universal service provision (USP), 6% of sales; and corporate tax (45%). It will enjoy lower corporate tax of 40% as a public entity.

Positive initiatives to spur growth include reviewing of Bangladesh’s National Telecom Policy, mobile number portability and spectrum auctions (1.8/2.1GHz in 2015/16 and 700MHz in 2016/17).

Robi has a vision to lead small screen data and become a strong No 2 in RMS by 2016 via simple and relevant offerings and enhanced end-to-end experience.

With GP trading at enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) of 8.5 times compared with HLIB’s ascribed value of six times, this will enhance Axiata’s valuations (12 sen or 1.6% to RM7.71).

An effective avenue to fund future capital expenditure chiefly in data infrastructure and spectrums (auction price circa US$21 million [RM74.55 million] per MHz) allows Robi to expand beyond CDC.

Catalysts include: (i) higher smartphone penetration boosting data average revenue per user; (ii) strong growth in developing markets with low penetration and (iii) more cost savings from collaboration with DiGi.Com Bhd.

Risks include: (i) regulatory risks; (ii) foreign exchange fluctuations and (iii) competitive risks. — HLB Research, Jan 12

This article first appeared in The Edge Financial Daily, on January 13, 2015.