This article first appeared in The Edge Financial Daily on April 6, 2018
Axiata Group Bhd
(April 5, RM5.25)
Maintain neutral with a lower target price (TP) of RM5.30: We met with Axiata Group Bhd’s management recently. We opine that the performance of its regional as well as home operating units would be moderate in 2018. Competition has intensified in markets like Indonesia, India and Singapore, while Malaysia and Nepal are expected to remain stable. However, we are trimming our financial year 2018 (FY18) to FY20 earnings forecasts by 10% to 12% to factor in start-up costs for Axiata’s investments in new digital businesses and a higher effective tax rate as some of its overseas operating units are being taxed at the revenue level. Consequently, our sum-of-the-parts-based TP is reduced from RM5.60 to RM5.30.
Competition in the Malaysian market is an ongoing issue that all telecommunications operators are adapting to. However, in 2018, competition is not expected to deteriorate to the level that we saw in 2015 and 2016, which resulted in a sharp decline in both the subscriber base and average revenue per user. We observed some stabilisation in 2017 and this is likely to continue into 2018. Celcom’s focus will be to enhance customer experience through network upgrade and increase the number of high-value customers, such as post-paid and less-price-sensitive users. XL performed well in 2017 but its performance may be affected by the new regulation imposed on SIM card registration. Thus far, approximately 10 million subscribers (or 19% of its total subscribers) have yet to be registered. Although the bulk of XL’s revenue-generating customers have already registered, some impact may still be felt if it loses customers due to registration failure. Generally, data competition has intensified in Indonesia, but the overall growth in the mobile market remains healthy in the long run due to the roll-out of 4G networks. Meanwhile, Ncell’s profitability remains strong despite falling international long-distance revenue. This is attributable to Ncell’s cost management and growth in mobile revenue. Group-wise, Axiata is targeting RM5 billion cost optimisation over the next five years in order to achieve a moderate growth.
New ventures will take time to generate meaningful returns. In FY18, Axiata is expected to invest some RM250 million in new digital businesses like the Internet of Things, financial services (such as e-wallet platforms), digital entertainment and advertising. However, these businesses are not likely to generate meaningful returns in the near term and investments will be treated as start-up losses for the group. This would have a drag on its profitability in the near future.
India will continue to affect the group’s earnings until the completion of Idea’s merger with Vodafone, which is expected in the second half of 2018. However, Axiata would have to make impairment of its investment in Idea that could potentially amount to RM2 billion once Idea is no longer an associated company. This would be one-off and seen as non-core, but we believe it could still affect the sentiment of Axiata’s share price performance. — PublicInvest Research, April 5