This article first appeared in The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020

TAN Sri Jamaludin Ibrahim — a known workaholic who is retiring as Axiata Group Bhd’s president and group CEO just two months shy of 13 years at the regional telecommunications operator that he helped name and shape — jokes about having more time to watch television series as the time to pass the baton to Datuk Mohd Izzaddin Idris, draws nearer.

Incidentally, Jamaludin — who spent 10 years as CEO at billionaire Ananda Krishnan’s telecoms operator Maxis Communications Bhd before joining Axiata in 2008 — is retiring on the same day as another respected industry veteran, Singapore Telecommunications Ltd group CEO Chua Sock Koong, who has a background in accountancy but spent 31 years at SingTel and 13 in her current position.

Izzaddin, who has been counting the days to Jan 1 backward, tells The Edge that he draws comfort from the fact that Jamaludin will still be in the country and is only a phone call and teh tarik away. “He has promised not to bar my number,” he says, after relating how he took six weeks before deciding to take the job.

“Axiata is a great [career growth] platform but [Jamaludin’s] shoes are big ones to fill ... Looking at his achievements in the industry, I think it would be second to none. The 11-month transition certainly helps,” says Izzaddin, adding that part of what made it easy for him to say yes is that there is already a good structure in place at Axiata.

“The foundation has been set, there is a great team … from the perspective of an incoming CEO, the first thing you have to worry about is people because if you don’t have the right people, recruitment will take time. Here, you can hit the ground running and do what needs to be done,” says Izzaddin, who has a background in finance and only three years’ experience in the telecoms industry, including the time he spent on the board of Axiata (since November 2016) before being appointed deputy group CEO on Jan 24 this year.

Speaking to The Edge in a joint interview, Jamaludin downplays any concerns about Izzaddin’s lack of working experience in the telecoms industry. “[The board and I] wanted someone with the best of both worlds, someone who knows enough about this company, the board and the people. But not too long so that things can be looked at from a fresh perspective and not be burdened by legacy,” he says.

“It was almost a flawless transition … every decision he made, I would have made the same also … [Izzaddin] coming from a background in finance is an added value because at Axiata, there is a lot of finance and investment-type of decisions, capital allocation, treasury and so on. By now [10 months on], he is already asking questions about the technical side, so he has picked up quite fast.”

Those familiar with the group’s journey would remember that Axiata was formed by combining Telekom Malaysia Bhd’s foreign assets (under TM International Bhd) with Malaysian mobile operation Celcom Malaysia Bhd. The demerger that saw Telekom and Axiata each have a separate listing on Bursa Malaysia came with the latter owing Telekom RM4 billion in cash.

There would probably be a debate on whether it was fair to measure Axiata’s growth from the reference price of RM7.85 (RM5.35 after adjusting for a five-for-four rights issue) that Axiata was accorded by the stock exchange at the point of the demerger in April 2008, which some reckon to be too high as the reference price accorded to Telekom was deemed too low owing to its generous dividend promise.

That Jamaludin was given the task of making Axiata a “regional champion” when he came on board as its first group CEO on March 3, 2008, perhaps also offers some perspective to investors trying to reconcile why Axiata, which has a regional portfolio, has a smaller market capitalisation than its two Malaysian-listed peers — Maxis and Digi.Com Bhd — which only have operations in Malaysia.

“In a way, it is a failure on my part to convince investors and so far, I’ve not been very successful,” says Jamaludin, talking about the challenge of balancing the need to invest for future growth while ensuring that investors are rewarded with fair returns.

“If I were short term, I could easily do a few things and that would instantly push up [Axiata’s] share price by RM1 or RM2. I would look really great, but what will happen three, four or five years from now? That would not be in the best interests of our organisation.

“Let’s say I don’t care about the future and I want to match the profit of [Maxis and Digi], no problem. We just sell a few companies for profit and we don’t have to invest any more in those companies … Indonesia and Bangladesh are huge, serving populations of more than 250 million and 150 million respectively with a lot of growth opportunities. Unfortunately, whatever profit we make, we have to invest again and again … Geographically, we cover 10 times more than Malaysia. Of course, we have to spend six times more in capital expenditure (capex), right?”

There are no issues with Axiata’s major shareholder, Khazanah Nasional Bhd, and other long-term investors, who understand the need to invest to secure future growth engines when maturing markets plateau and even perhaps see negative growth given that the pricing of telecoms services can be a challenge, even though the demand for it is expected to continue rising.

“Let’s say tomorrow, we sell off Celcom. Celcom does not even have to perform as well as Maxis or Digi. But if we just take Celcom’s Ebitda (earnings before interest, tax, depreciation and amortisation) and value it separately, we would easily get an incremental valuation of RM5 billion to RM10 billion overnight compared with what investors are currently valuing Axiata at, provided that I have the same kind of dividend policy … I’m not saying we will spin off Celcom. All I’m saying is that we have an asset that is not properly valued by investors because it is stuck inside Axiata,” says Jamaludin, noting that Celcom is currently valued at only seven times Ebitda, much lower than the 12 to 13 times accorded to Maxis and Digi (see accompanying story).

There is good news, though, for investors asking why Maxis and Digi make RM1.5 billion in profit each while Axiata only generates about RM1 billion, and why Axiata needs to spend RM6 billion a year on capex versus only about RM1 billion at Maxis and Digi. A plan is already underway to free up more cash to pay investors more dividends within four years, perhaps earlier.

A big part of the extra cash to be freed up to raise dividend payments would come from making sure a lot more cost savings can be had using the group’s collective purchasing power in areas like network equipment, which forms 60% of Axiata’s annual capex.

While there was already some coordination in terms of purchasing, Izzaddin says the corporate centre will be taking it a step further by taking over the function from the operating companies in different countries and negotiating directly on their behalf. “That should generate a lot of savings … together, we have a pretty formidable bargaining position.”

“We are talking about RM3 billion in savings over the next three years,” Jamaludin adds. “By end of the year, we expect to still have RM5 billion to RM6 billion cash and a net debt-to-Ebitda of about 2.6 times to 2.7 times, which is very healthy. To give more dividends, we only need about RM2 billion a year.

“In a way, we are already a regional champion in terms of size, footprint and revenue. Until now, our investor proposition has been moderate growth, moderate dividend. Within four years, we will transform into high dividend. When we presented the plan to the board in July, they asked the same question: how?”

“First is having a strong balance sheet. Second, we bring down costs dramatically and, third, we want to be sustainable, so we are building growth areas in enterprise and home [where penetration is low]. So, our weakness becomes our strength [in terms of opportunities for growth]. To make that happen, profit and cash will be the two areas with the biggest weightage in terms of performance criteria or KPI for our managers,” he says, noting how that is a change from the previous stance of valuing revenue, Ebitda and market share when the group was more focused on growth.

Izzaddin adds, “Our plan is to have more than 75% cost reduction per gigabyte over the next five years … 20 sen [dividend per share] for nine billion shares is only RM1.8 billion. In terms of operating expenditure efficiency, we are very good. But capex efficiency, we are not the best. However, the good news is that we have a lot more savings to be done.”

Axiata paid a dividend of 9.5 sen per share in FY2018 and FY2019 (up from 8.5 sen in FY2017 and 8 sen in FY2016, but still less than half of the 20 sen in FY2015 and 22 sen in FY2014 and FY2013). It has only paid out 2 sen per share for this financial year as at 1H2020 (compared with 5 sen per share as at 1H2019) as it is choosing to be conservative amid the uncertainties surrounding the ongoing Covid-19 pandemic. It did not declare a dividend when it released its third quarter results last Friday.

Without saying specifically when Axiata intends to start paying dividends nearer to 20 sen again, Izzaddin says 20 sen “is a good benchmark” as it was what Axiata paid shareholders when its net profit was above RM2 billion a year from FY2013 to FY2015. “We do realise that in the Malaysian stock market, valuation is determined, to a large extent, by how much dividend you pay and how consistent the dividend is, so we don’t really have a choice … the challenge is to balance the need to invest and make sure we still have money to pay dividends.”

While it may seem that Axiata is giving in to investors’ thirst for more dividends, both Izzaddin and Jamaludin note that the Axiata board ultimately serves as the final voice of whether a decision is in the group’s best interests. That, they say, balances out any short-term decisions by managers who may not be around to face the music once their contracts end. Izzaddin’s contract is for three years, just like Jamaludin’s initial tenure. “Among the reasons we chose Izzaddin was because we didn’t think he was a short-term person,” Jamaludin adds.

Izzaddin shares Jamaludin’s perspective that Axiata is grossly undervalued but believes that the numbers will speak for themselves over time. “If for some reason, things haven’t quite worked out yet at some stage, when people sit back and look at what we’ve done and what we are going to do, I think people will pay attention.”

Would investors have made money investing in Axiata? The answer is a clear yes — if you are lucky enough to have picked up Axiata shares when the stock plunged by two-thirds to an all-time low of RM1.08 as at end-March 2009, when news of its RM5.25 billion five-for-four rights issue was announced. That was about a year after the demerger.

The answer would also have been a clear yes if one had taken profit in late 2014 when Axiata shares were at their peak of more than RM6.30 apiece — nearly double the RM3.30 it was hovering at at the time of writing. Since 2014, more than RM20 billion in market capitalisation has been wiped out, even as the operating environment in emerging markets becomes even more challenging.

Incidentally, the total returns were also negative over the same period at SingTel, which went into the red in 2019, owing to sizeable provisions and losses incurred by its Indian associate Bharti Airtel.

Jamaludin describes the RM4.9 billion that Axiata lost in India as “the saddest part of [his] entire career”, even though bigger players lost many times more than that. “In hindsight, we should have sold Spice when it was small and we made very good profits for eight years after we merged with Idea Cellular … but who would have expected Jio to do what it did in India?” he says, referring to billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd, which disrupted the Indian telecoms industry.

With the added attention on unlocking value the way more investors want it to, Izzaddin asks that they “watch this space” for progress.

Noting that Axiata has paid out more than RM13.8 billion in dividends from RM21.8 billion in profits over the past 12 years, Jamaludin has few regrets. He hopes that Izzaddin will have more success than him in delivering consolidation in Malaysia, Indonesia and Bangladesh. “We may not need it now or even two to three years down the road, but consolidation is necessary for longer-term sustainability.”

Is this goodbye to Corporate Malaysia and the telecoms sector for Jamaludin? “Yes, this is goodbye … but you never know, [one should] never say never again.”

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