This article first appeared in The Edge Malaysia Weekly on May 25, 2020 - May 31, 2020
Balancing how much dividend to pay
AXIATA Group Bhd has paid shareholders more than its dividend guidance of at least 30% of its profits every year since 2011. It also continued to pay dividends in 2018 — and increased it back to 2015 levels as promised, after a two-year reduction to accelerate capital expenditure and build a larger war chest — despite recording a RM4.8 billion headline net loss on the back of sizeable impairments on its investment in India.
Payouts had been at least 50% of profits attributed to shareholders and had exceeded 80% in four years (including 2018 and 2019), according to data appended in its 2019 annual report, in which the board reiterated Axiata’s value proposition of “moderate growth and moderate dividend” and commitment to its 30% minimum dividend guidance.
Investors have long valued Malaysia’s key telecoms stocks largely for their dividend-paying ability — it is why Maxis Bhd, which has only Malaysian operations, commands a higher market capitalisation than Axiata, with multiple assets outside Malaysia since 2018.
Would uncertainties surrounding Covid-19 give telecom companies an opportunity to reset investors’ expectations?
Tan Sri Jamaludin Ibrahim, president and group CEO of Axiata, says the company has every intention of paying dividends, but he also admits the need to conserve cash to be better positioned for opportunities in the new normal.
“Our balance sheet is strong enough and we can pay dividends. The question is not whether we can, but should we be much more prudent, in case anything happens? We’ve not been able to answer that question. We’ve not decided what to do,” he says.
What is certain is that Axiata needs to continue to be highly disciplined on costs. The answer to that question may well present itself when the company has greater clarity as the economic situation unfolds in the coming months.
TAN Sri Jamaludin Ibrahim, president and group CEO of Axiata Group Bhd, used to joke that he should not join any more companies.
“When I joined Maxis [Communications Bhd] in 1997, three months later, it was the Asian financial crisis. When I joined Axiata in 2008, less than six months later, there was the global financial crisis (GFC). So, I joked that I shouldn’t be joining any more companies because it could be worse than the GFC. But I was only partially right. Before I could exit Axiata, [the Covid-19 great lockdown recession] happened.”
For a man facing a major economic crisis as CEO for the third time in 23 years, and less than a year to retirement from a full-time job, Jamaludin, 61, shows no sign of winding down just yet. He also looks none the worse for wear for having to balance the running and repositioning of Axiata for the new normal, along with his public service as a member of the Economic Action Council (EAC) since March.
His excitement stems from the recognition of there being opportunities in every crisis — as aptly shown by the characters “wei” (danger) and “ji” (opportunity) that make up the Chinese word for crisis — even though the scale of the fallout from Covid-19 globally is proving to be unlike any other seen before.
As seen from the expected withdrawal of Axiata’s FY2020 guidance and how its first-quarter numbers came in below expectations last Thursday (May 21), there is zero chance of escaping unscathed, even for sizeable dividend-paying companies in the right industry that provide necessary utilities such as telecoms.
“If you look at the spectrum of companies, our [telecoms] industry is better off than many, [but] we will be affected ... The real problem actually happens after this [initial period of lockdown], when people have no jobs and a lot of companies become insolvent … The impact on the industry will be quite significant,” he tells The Edge in a web-based interview, flagging the possibility of lower prepaid reloads as well as delays in postpaid and enterprise receipts.
Put another way, telcos that are seen to be cash-rich and have been paying good dividends to shareholders may well be expected to do community service by delaying or even forgoing some revenue while needing to overcome movement restrictions to ensure their network can handle the surge and changes in data usage patterns as more people stay or work from home.
Greater impact on earnings is likely to be seen from the second quarter, given that the various phases of lockdowns took place only from mid-March.
During the Movement Control Order (MCO), for instance, telecoms operators — including Axiata’s unit Celcom — gave free 1GB internet service to Malaysians said to be worth over RM300 million. Axiata’s units in Indonesia (XL), Sri Lanka (Dialog) and Nepal (NCell) also gave their customers free data access and other bonuses.
Boost — Axiata Digital’s digital wallet unit — saw 1.8 times year-on-year growth in user base to 7.3 million and gross transaction value jump 10.5 times year on year, with users spending an average of RM323 per week (versus RM114 per week the year before). It incurred additional losses in 1Q2020, however, as it gave out goodies to woo users as one of three digital wallets (alongside Touch ’n’ Go and GrabPay) selected by Khazanah Nasional Bhd to facilitate the redemption of the free RM30 e-Tunai Rakyat e-wallet initiative from the government earlier this year.
Analysts and investors are also waiting to see whether fees for spectrum allocations will be pricier than expected for telecom operators, after government officials cited spectrum as a possible source of additional income to bolster public coffers, which had been hit by lower oil prices and drawn down to support people and businesses hit by the pandemic.
There is also considerable uncertainty for consumers and businesses during the period of adjustment between the lifting of the lockdowns until a vaccine is proven and made available globally. Some pundits have likened this period to the lull or lower part of a “tick” or “the Nike swoosh”-like recovery that many economies and companies could face.
If people and businesses were reluctant to upgrade on technology to improve or seek growth, the challenges and changes to consumer behaviour from Covid-19 may now force many to change for their survival, if not to suit preferences in the new norm of possible prolonged social distancing. Even as offices began to reopen, more companies such as Twitter have taken note of benefits such as reduced commuting time and lower operating costs to allow employees to work from home permanently.
“Who would have thought that the biggest driver for digitisation is the coronavirus, not CEOs or anything else?” Jamaludin asks, noting that many companies were affected during the lockdown because they or their customers and suppliers were not digitised.
“The most highly exposed are [small and medium-size enterprises] and micro-SMEs … The whole supply chain is in a bit of a topsy-turvy right now. Many suppliers and dealers are closed and, in South Asian countries where many customers are not online, it is tough. Customers are affected because they are at home and later may not have a job. That’s the [regional] ecosystem we are now faced with,” he says.
Axiata also has telecoms operations in Cambodia (Smart) and Bangladesh (Robi). Its infrastructure unit (edotco) has assets in Malaysia, Bangladesh, Sri Lanka, Cambodia, Myanmar, Pakistan and Laos.
“The next two years are going to be tough, very tough, in fact. I would be very optimistic if you want to invest beyond two years and say this [telecoms] would be the industry. What used to be a luxury item has become as important as water and electricity … If you’re not [connected] online, you cannot survive. It is as simple as that,” says Jamaludin, who reckons that the world will emerge different post-Covid-19 because of the acceleration in digitisation and its wider acceptance.
“I used to fly to Singapore for one-hour meetings because it was a board meeting but, today, we are so comfortable with Microsoft Teams or Zoom. Why would I spend one whole day just for a one or two-hour meeting? Similarly, I would not fly to Indonesia or any other place just for a two-hour meeting. It is sometimes good to see people, but I would not make it a must anymore. That, I think, would be permanent. Airlines will be affected if a lot of people think like me; and tourism will also be affected, maybe not as bad as now, but it will still be affected. That’s what I think is the picture of tomorrow,” he says, noting that Axiata is able to function at 90% BAU (business-as-usual) even as everyone works from home during the MCO because of cloud technology and how much video conferencing has advanced compared with the early days.
Countries and businesses will have to think of new ways to market themselves online, for example, by putting up videos or virtual tours that will get people excited about visiting Penang Hill, Batu Caves or a theme park.
That said, just as people return to places that have experienced earthquakes, tsunamis and bomb scares, Jamaludin reckons the new normal will not stop at online experience alone but “will be a nice balance” between physical and virtual.
Telecoms operators stand to benefit, as everyone will need to prepare for that eventuality. “Everyone will have to change. Very few businesses can stay as they are … Mark my words: Two years from now, [telecoms] will be one of the best sectors to be in all over again.”
Who will pay for digitisation?
The lag is because of near-term cost challenges. Even if more businesses are willing to digitise, Jamaludin concedes that their ability, or lack thereof, to immediately come up with the investment on digital capabilities might be an issue during these tough times.
“We are exploring the possibility [of extending credit]. We can’t [do it] directly at the moment, but as part of the solution, we might be able to do that either back-to-back with the government, a bank or our own fund,” he says, pointing out that Axiata will be making further announcements on this front and how it intends to accelerate the digitisation of SMEs. Meanwhile, the group has already been doing limited micro-lending and will continue to do so.
Apart from the Axiata Covid-19 Assistance Program — the RM150 million cash fund to provide immediate assistance to micro-SMEs, which saw a RM20 million initial contribution from the Ministry of Finance — the group, via Axiata Digital’s Aspirasi digital platform, has already been providing shariah-compliant micro-financing in the range of RM1,000 to RM10,000 each, where approval can be obtained online in just three minutes and the loan disbursed within 48 hours.
Axiata Digital is among companies vying for a digital banking licence that is expected to be issued by Bank Negara Malaysia within the coming year. Besides its e-wallet (Boost), the group’s digital businesses include digital advertising (ADA), micro-financing and micro-insurance (Aspirasi) and application programme interface platform (Apigate).
These channels can be better positioned to benefit more micro-SMEs, basically people who operate from their homes, selling kueh or nasi dagang using Facebook or WhatsApp. “We want to help them to survive, link them to the e-commerce engine and provide them with the tools to make that happen.”
Facebook may well be thinking along those lines, with CEO Mark Zuckerberg announcing the “Facebook Shops” feature last Tuesday (May 19) as one that allows easy listing of products on Facebook and Instagram — barely a month after he sealed a deal that gave Facebook a 9.99% stake in Indian billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. They are already piloting the JioMart grocery shopping venture in Mumbai via Facebook-owned WhatsApp.
Recall that Jio’s 2016 entry with free calls and cheap data severely disrupted the Indian telecoms industry and caused Axiata to fall into the red in FY2018, following sizeable writedowns in the value of its investment in Vodafone Idea Ltd. Singapore Telecommunications Ltd also reported its first-ever quarterly loss last year, owing to its Indian associate Bharti Airtel’s exposure to the brutal tariff war.
Axiata no longer has exposure in India, having sold its remaining 1.05% stake in Vodafone Idea for RM77.3 million on March 13, according to notes to its 1QFY2020 earnings report.
Are overseas ventures worth the risk?
Outside India, Axiata had faced other regulatory-related challenges as it sought to deepen its foothold in the South Asian countries it has operations in.
The company has filed for arbitration with the International Centre for the Settlement of Investment Disputes in the UK to dispute a ruling by the Supreme Court of Nepal that its Nepalese unit Ncell Pte Ltd is liable to pay more than RM800 million in alleged outstanding capital gains tax (CGT) plus interests and penalties. In Bangladesh, Robi is appealing against multiple demand claims totalling some RM1 billion allegedly for evading supplementary duty and value-added tax (VAT) payments. Their solicitors reckon they have a strong case on Ncell as well as Robi.
Even though Axiata has paid the disputed Ncell CGT, Jamaludin says its auditors have agreed that they do not need to make additional provisions on the disputed CGT just yet, as there is already a sizeable provision pool for ongoing disputes, including for Robi’s VAT, that are unlikely to reach a verdict this year. On the contrary, there could be a boost for Axiata if the outcome of the Ncell arbitration is in its favour.
“We have a strong case and, because of that, both the audit committee and our external auditor are convinced that we don’t have to charge the remaining amount to our [profit and loss] this year. So, the impact of the Nepal CGT, at least for this quarter and the next, will be zero,” he explains.
Why not just stay in Malaysia, since the risks of investing abroad are high and returns are more certain here?
“My duty is also to look beyond two, three or five years … Bangladesh has a population of 170 million and Indonesia, 270 million. And many economists had predicted that, by 2040, they would be among the top 10 largest economies. Why would I sacrifice the future [for short-term gains]?”
Even before Covid-19, Jamaludin says, Axiata had decided not to expand beyond the six countries it already has mobile operations in. “Edotco, however, is an exception. We are still aggressive. We want to spend money where we see shorter-term returns. Obviously, the ROI (return on investment) in Malaysia is faster and generally better than in many other countries.
“Many other countries are generally longer-term [but] countries like Indonesia and Bangladesh have a large population, and we have high certainty that the investment will be a happy one many years from now. Unfortunately, the payback for both cases will be much longer than Malaysia,” he explains.
Even if Axiata had to pay the RM800 million CGT for its stake in Ncell, Jamaludin says the price it paid would still be “fair”. “That’s about two years of profit. We’ve brought back over US$400 million already [from Ncell].”
Jamaludin stresses that Axiata’s investments abroad do not deprive Malaysia of future investments since these units are all “financially independent”. “I wouldn’t have been able to say that five years ago, because we were pumping money into many countries. But, from this year, all our [operating companies] are self-sufficient. In other words, their free cash flow is enough to fund their own [capital expenditure] or their balance sheet is strong enough to borrow more money without injection from the corporate centre or anywhere else … The caveat is if we were to do mergers, but even that [could be structured] to not need additional cash from us. Therefore, the decision on how much to invest is Malaysia is more on the returns. The returns on 4G investments are coming in and we are now able to invest more,” he says.
Investments in 5G are not about funding but the lack of “good business case on a standalone basis” and that is why “the only way is to work with other operators and initially focus on fixed wireless access and enterprise”, he adds.
Looking beyond two years
Jamaludin, who cannot imagine having a full-time job after retiring from Axiata, says industry consolidation is the one thing that he did not deliver on. “It should have happened two years ago or last year, but it didn’t. We’re still working on it … but it is so hard to get consolidation done,” he said, without referring directly the audacious mega-merger between Axiata and Telenor Asia, which fell through last September.
The process of passing the baton to his deputy, Datuk Mohd Izzaddin Idris, is going well, thanks to the group’s structured four-step business transition plan. “The idea is that, by the fourth quarter, he can more or less manage the whole company. Most of the responsibilities will be delegated to him by then. In theory, I can leave by Oct 1, but we added one more quarter as insurance,” he says, noting Izzaddin’s advantage of having been an Axiata board member since November 2016 even though he is not from the telecoms industry.
While he will no longer be president and CEO by year-end, Jamaludin reckons that the capabilities that Axiata has built over the years in analytics and digitisation will be a key differentiator for the group as it positions itself for the economic rebound.
“We are investing and coming up with new solutions because we want to change the problem into an opportunity. We believe this can happen within two years and, with our strong balance sheet and [earnings] trajectory, we are well positioned for the rebound.”
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