This article first appeared in The Edge Financial Daily on February 13, 2020

Axiata Group Bhd
(Feb 12, RM4.36)
Maintain buy with an unchanged fair value of RM4.90: Following the teleconference with the management of the group’s 66.5%-owned PT XL Axiata Tbk, we remain cautiously optimistic about the Indonesia-based cellular operator which accounts for 13% of Axiata Group Bhd’s standard operating procedure. These are the highlights of the teleconference:

Competition is intensifying in Indonesia with three operators recently launching unlimited data packages together with more affordable products. These include the largest operator PT Telekomunikasi Selular as well as PT Indosat Tbk and CK Hutchison Holdings’ 3.

While offering unlimited YouTube during restricted hours, XL currently does not offer unlimited data packages nor aims to be the first mover in a price war. Hence, XL is guiding for a more moderate “in line with market” revenue growth for its forecasted financial year 2020 (FY20F) outlook versus “better-than-market” for FY19.

As data share of service revenue continued to rise to 91% for its fourth quarter of FY19 (4QFY19) from 82% for 4QFY18, the management is monitoring the rising competition closely to adjust its marketing plans.

M\The management’s FY20F earnings before interest, taxes, depreciation  and amortisation (Ebitda) margin guidance of low 40% versus 40% for FY19 stems from expectations of revenue growth and operational efficiencies. However, as post-IFRS 16 for lease accounting impact will have a positive impact Ebitda, XL expects margins to be higher at mid-40%.

The group’s seven trillion rupiah capital expenditure will focus on fiberising and expanding its tower sites, which have increased 10% year-on-year to 130,217 base stations as at 4QFY19. The group will continue to shift its 2G and 3G stations, which account for 69% of its portfolio, towards 4G to meet escalating data traffic.

In its third tower sale which could deleverage its FY20F net debt-to-Ebitda ratio of 1.1 times to a more accommodative 0.7 times, XL has sold and leased back 2,782 telecommunications towers for 4.1 billion rupiah to PT Profesional Telekomunikasi Indonesia and PT Centratama Menara Indonesia via tender. Leasing these units for 10 years, XL continues to own 1,600 towers and has indicated no plans for future disposals.

For a regional operator with excellent prospects of monetising its multiple businesses, Axiata currently trades at a bargain FY20F enterprise value/Ebitda of five times versus Maxis’ 13 times. — AmInvestment Bank, Feb 12