This article first appeared in The Edge Malaysia Weekly on October 29, 2018 - November 4, 2018

TAN Sri Jamaludin Ibrahim wants to hear wedding bells. President and group CEO of Axiata Group Bhd reckons that Malaysia’s telecommunications industry is among those in the region that are overdue for consolidation and does not rule out being the active party for “value-accretive” acquisitions in the markets where it is already present.

“Malaysia, Indonesia and, to some extent, Sri Lanka need restructuring. Remember when Malaysia was a three-player market? We were all profitable but now, it is a tough market. There are too many players … in Indonesia, only one player is making money, the rest don’t … so hopefully, there will be consolidation. It does not have to be us. We are normally the active player in consolidation but we will still celebrate if anybody else consolidates,” he tells The Edge.

“If tomorrow, one of the other operators merges, the market share for everybody will improve … Hopefully, [there will be] one [consolidation] within the next two years in these three territories.”

Axiata’s 62.37%-owned tower company, edotco, is also on the prowl for at least one or two more acquisitions over a year or two. The regional telecoms group is also looking to boost its convergence and digital portfolio, and welcomes partners to be co-investors.

“We are quite conservative when it comes to M&A (mergers and acquisitions) now. We will look at M&A that are earnings accretive within a year or two … too many years and [investors] will likely take a conservative stance [and not like the deal],” Jamaludin says, pointing to how its acquisition of Ncell in Nepal was earnings accretive within a year. edotco’s failed US$940 million purchase of Pakistan tower company Deodar would have been earnings accretive from the first year as well.

Deals that would boost its earnings base, he says, is one area Axiata is looking at to help bring back value to its share price, which had plunged 40% year to date to its lowest level in eight years on concerns over near-term profitability. The RM20 billion lost in market capitalisation valued Axiata lower than Malaysia-based mobile operators Maxis Bhd and DiGi.Com Bhd.

Apart from its 100% stake in Celcom in Malaysia, Axiata also owns controlling stakes in Indonesia’s XL Axiata, Dialog in Sri Lanka, Robi in Bangladesh, Smart Cambodia and Ncell in Nepal.

It also has an associate 8% stake in India’s largest telecoms carrier, Vodafone Idea Ltd, and a 28.7% stake in Singapore’s mobile carrier M1 Ltd that is worth S$547 million (RM1.7 billion) if it accepts the S$2.06 apiece offer from Singapore Press Holdings Ltd-Keppel Corp Ltd, which was below M1’s closing price of S$2.09 last Friday.

edotco is worth more than US$2.1 billion, Jamaludin says. Axiata Digital, in which it has invested US$200 million, has a number of promising ventures that its people are grooming for membership in the billion-dollar start-up club (see “Realising Axiata Digital’s 2022 unicorn dream” on Page 80).

Jamaludin agrees that the hoped-for initial public offering (IPO) of edotco will help shore up investor confidence in Axiata but says the priority is creating longer-term value.

“We have enough war chest to buy small and medium-sized companies. For larger companies, we would either have to get a partner to bid jointly or we do a share swap or a combination of share swap and share or, depending on the visibility of the income, we might just proceed with cash (securitisation). We can do that if the income coming in is predictable, in which case the rating agencies also would not mind.”

While the fall in Axiata’s share price limits its usage as M&A currency, Jamaludin points out that unlisted shares of operating companies can also be used as an exchange, should the need arise. There is also the option to bring in like-minded financial co-investors for larger deals — an option that Axiata would need to consider should it decide to make a counter offer to Singapore’s M1, given its limited headroom for debt.

A weaker ringgit has shored up Axiata’s net debt to Ebitda levels from two times to 2.3 times, close to its 2.5 times self-imposed limit. Assuming an Ebitda of RM8 billion — Axiata’s Ebitda has ranged between RM7 billion and RM9 billion in the past four years — a 0.5 times multiple would have provided a roughly RM4 billion headroom and 0.2 times, only RM1.6 billion.

Jamaludin, who would not comment on Axiata’s entry cost for M1 or its next move in Singapore, says the city state is a viable market for the longer term with high ARPU users. For Axiata, however, M1 is “not entirely strategic” because it does not have management control over the affiliate. Axiata had paid S$260.8 million or S$2.20 a share for its initial 12.1% stake in M1 in 2005.
 

High margins necessary

Jamaludin’s wish for industry consolidation comes when players in Malaysia are girding for more competition with Communications and Multimedia Minister Gobind Singh Deo indicating the government’s openness to issue new licences to any party willing to invest in next-generation infrastructure to deliver cheaper and faster high-speed broadband to all Malaysians.

The pressure is also on existing telecoms operators to raise their infrastructure investment in Malaysia as pundits point to their large profits and what they deem as excessive margins.

Jamaludin, however, begs to differ. “We make a lot of margins relative to other industries, perhaps, but you have to differentiate between a trading company and one that is capex-intensive. Trading companies should make less margins because gross margin is almost equal to profit. For us, there is a lot after our Ebitda; there is finance cost because we have big debt to support our big capex, depreciation and amortisation cost, impairment here and there … Obviously, we need big [Ebitda] margins to support the high investment.

“We (Axiata) spend RM7 billion a year on capex [group-wide] and invested wrongly, our cash will disappear within a year or two. So, apart from covering costs like trading companies and others, the high risk associated with our industry means there is need for a buffer … in fact, 30% to 40% Ebitda margin is not enough; we need 40% to 50% to invest all the time. Look at Celcom — the industry is flat and yet we invest over RM1 billion a year with no incremental revenue,” he explains.

“The industry is sick … the business is still viable but the industry is not as healthy as it used to be. In the mobile industry over the last four years, from 2013 to 2017, revenue has dropped 9% and profit is down 15%. We lost RM2.1 billion [revenue] as an industry and RM850 million in profit collectively. It is not a disaster [we are still profitable] but everything is going downwards. If you’re down every year in profit, [the industry] is not interesting [sexy].”

To be clear, Jamaludin is not saying Axiata is looking to exit any particular market but that at least three markets it is in could do with better operating conditions to incentivise continued high investments. Axiata is also not looking to remerge with Telekom Malaysia Bhd, but does not rule out a partnership.

In Malaysia, industry insiders say the opening of Tenaga Nasional Bhd’s network for potential sharing can aid in lowering broadband coverage costs, although it is not immediately certain how much of its infrastructure can be used to expand broadband coverage. The lowering of wholesale prices via the mandatory standard on access pricing is also a step in the right direction to lower broadband rollout costs but experts say there are other parts of the ecosystem where costs are not regulated, including lease lines for the last mile and tower sites. Broadband rollout costs would also fall if there were no need to do extra digging because ducts are already provided when an area or building is developed — an area that has been talked about for some time but not implemented.

“If the government or regulators say it will make sure spectrum fees are not burdensome, there will be more incentive for broadband and 5G investments, the market would have taken it (the directive to cut prices and double speeds) better,” says an industry expert.
 

Partners and co-investors

While Jamaludin reckons that the days of mobile operators being the darlings of investors are not over, he concurs they are “not as great as before”.

“Globally, it is quite true. In almost every continent, the majority of telcos, especially in developed countries, are seeing negative growth in both profit and revenue … that is why I have to branch out beyond mobile to home broadband, enterprise, not just consumer, digital and towerco.

“We are fortunate that we are not just in Malaysia, where growth is flat. Fortunately, in the other countries, growth — while not double digits anymore — is still between mid and high single digit. So that will help us (Axiata). Last year, 27% of revenue was from Malaysia. In five years’ time, we expect around 20% to 25%,” he says.

Jamaludin also expects non-mobile revenue, including broadband, to form a greater part of group revenue within five years. “In 2007, 98% of revenue was mobile, last year, it was 86%. In five years’ time, we expect it to be only 70% ... Connectivity, or the pure dumb pipe, was 98% of business in 2007. In 2017, it was 94%. In five years’ time, we expect it to be only 80% of revenue … So we need to grow our business outside mobile. We need to make sure our portfolio has growth [potential].”

Axiata is also looking for partners to co-invest in expanding its digital portfolio — another area the group is working on to create more value for investors.

Whether or not Axiata sells its stake in M1 and exits Singapore, Jamaludin says its regional aspirations remain intact as footprint is but one indicator: “We started with RM10 billion in [group] revenue in 2008, and had RM24.4 billion at end-2017. That’s more than 140% growth. We started with pure mobile. Now we have mobile, towerco, a bit of convergence play, the three verticals of digital companies.

“We have RM6 billion cash in hand. The only way for dividends to increase is if we improve our profits. Our PAT (profit after tax) margin is under pressure because we are investing a lot. Hopefully, we can reap the benefits of our investments in the next few years … we hope to not just increase our dividend payout ratio but also the income. It should be on an upward trend in the medium term.” 
 

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