Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on February 26, 2018

KUALA LUMPUR: Axiata Group Bhd’s good showing in the financial year just ended has seen its stock’s valuation become less expensive. Last Thursday, the telecommunications group reported an 80.4% year-on-year (y-o-y) jump in net profit to RM909.48 million, while revenue rose 13.2% y-o-y to a record RM24.4 billion in the financial year ended Dec 31, 2017 (FY17).

The stock currently trades at 55 times its earnings over the trailing 12 months. That compares to a price-earnings ratio (PER) of 88 times before the latest earnings announcement.

However, Axiata’s stock remains pricey relative to its regional peers such as Singapore Telecommunications Ltd, whose shares were trading at 9.79 times at last Friday’s closing. Its local rival Maxis Bhd was trading at 21 times to its earnings, while DiGi.Com Bhd has a PER of 25.8 times.

JF Apex Securities Bhd analyst Lee Cherng Wee said although Axiata is more expensive than its regional peers, the prospects of Axiata are promising through its subsidiaries Celcom Axiata Bhd and PT XL Axiata Tbk.

Celcom and XL are the two largest contributors to Axiata’s revenue, accounting for 27% and 30.2% respectively in FY17.

Lee thinks the growth momentum in its subsidiaries Celcom and XL will continue in FY18 as their ongoing cost efficiency improvement programme was reflected in the FY17 results.

Still, analysts aren’t getting too excited about Axiata’s performance in FY18.

Lee is of the view that FY18 would still be challenging for Axiata due to regulatory risk in its operating companies (Opcos) in various different markets and ongoing price war, especially in Indonesia.

While its president and group chief executive officer Tan Sri Jamaludin Ibrahim noted that the group improved by “leaps and bounds” in FY17 compared with FY16, he said Axiata is “still not there yet”.

At the group’s fourth quarter of FY17 (4QFY17) media briefing last week, Jamaludin pointed out that even though Celcom’s and XL’s turnaround plans are on track, their recoveries have not completed so far.

The group has set key performance indicators (KPIs) for FY18 of a 6.3% revenue growth, earnings before interest, taxes, depreciation and amortisation growth of 5.8%, up to 5.5% return on invested capital, 5% return on capital employed and capital expenditure of RM7.4 billion.

Hong Leong Investment Bank (HLIB) Research analyst Tan J Young is of the view that the KPIs for FY18 are “not so exciting”.

“Results-wise, it was okay [for FY17]. However, Axiata’s Indian associate Idea Cellular Ltd was a drag on the group’s earnings and will continue to be so in the near term.

“Management guidance for FY18 was not so exciting. We prefer to wait and see for now [as] we need to see more recoveries from Celcom and XL,” Tan told The Edge Financial Daily over the phone. He has a “hold” call on Axiata, with a target price of RM5.01.

Bloomberg data showed that out of the 27 analysts covering Axiata, 16 have issued “hold” recommendations on the stock, two have “sell” calls and nine have “buy” ratings. Their target prices range from RM4 to RM6.50.

The counter closed two sen or 0.35% lower at RM5.65 last Friday, giving it a market capitalisation of RM51.12 billion.

An analyst who declined to be named said Celcom’s recent reduction in cost was also in line with lower subscriber base. “When you have fewer subscribers, naturally cost would be lower as well, in terms of customer service and direct costs,” he added.

“The Malaysian market is somewhat mature now, Axiata’s future growth has to be driven by its venture in emerging markets. For example, [its 83.32%-owned] Dialog Axiata PLC reported strong growth in FY17, Opcos like this, except for investment in India, are yielding results,” the analyst added.

Lee, who has a “hold” call on Axiata with a target price of RM5.20, said the group’s intention to seek growth by investing into fixed wireless broadband this year may be challenging.

“It will have to start small as it has cleared the air that there will not be a merger with Telekom Malaysia Bhd (TM). Likewise, TM’s Unifi Mobile will face difficulties growing [fast]. A merger would have been a short cut for both companies, but it is a complex matter,” he said.

Lee was referring to Jamaludin’s remarks on Thursday that there was no re-merger talks ongoing between Axiata and TM despite the potential synergies. Rather, both companies will undertake usual business collaboration to leverage on their respective strengths, he said.

HLIB Research’s Tan said over the long run, it is still better for both parties to merge as Malaysian market is too crowded.

“In the long run, we think it is still better to merge Axiata’s domestic opco, which is Celcom, with TM, because they will eventually step into each other’s field. An entire merger between TM and Axiata may not as synergistic,” he said.

“Malaysia market is still crowded to me, taking into account of TM’s Unifi Mobile, we have five major ones, plus the other mobile virtual network operators, it is too many for our population of 31 million people.

In the US, they have four major operators, serving more than 300 million population, while there are only three major operators in China, with population of more than 1.3 billion people,” Tan added.

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