This article first appeared in The Edge Malaysia Weekly on September 23, 2019 - September 29, 2019

EVEN at 10.30pm on a Wednesday night, Axiata Group Bhd president and CEO Tan Sri Jamaludin Ibrahim looked none the worse for wear from the succession of meetings pre and post the letdown from the Sept 6 collapse of the mega merger negotiation with Telenor Asia Ltd that critics had said was doomed from the start. He is living proof that 60 is the new 40. With 23 years’ experience in the telecommunications industry after 12 years in IT, one would be hard-pressed to find anyone with similar credentials.

Jamaludin, however, offers the name Rosli Man, chairman of Telekom Malaysia Bhd, as someone with even more industry experience.

Rosli, who is five years older than Jamaludin, had joined Jabatan Telekom Malaysia in 1976 and was instrumental in setting up Celcom (M) Sdn Bhd between 1988 and 1996. In the early 2000s, Rosli was chief operating officer at PT Natrindo Telpon Seluler (NTS), which is now known as Axis and became a unit of XL Axiata in Indonesia in 2013.

Celcom and XL are Axiata’s two largest revenue and Ebitda (earnings before interest, tax, depreciation and amortisation) contributors, bringing in 55% of revenue and Ebitda in FY2018. Celcom brought in nearly two-thirds of the normalised profit after tax for the group last year owing to the tough operating landscape in Indonesia, which Jamaludin says is poised to improve this year.

Could Rosli be Axiata’s chairman some day and will that be following Axiata’s re-merger with Telekom or just Celcom with Telekom?

Jamaludin is not one to comment on speculation and would only say that a re-merger is currently not on the table. While acknowledging that synergies could be derived from any merger, including the long-speculated permutations with Telekom, the amount of savings to be had would vary according to partnership and industry conditions.

While a re-merger with Telekom might yield certain synergies, such a merger would not provide the same size of customer base or efficiency yield gains from a merger between two of the three largest mobile operators in Malaysia.

Without forced layoffs, Jamaludin had said 70% of synergies from the botched Axiata-Telenor Asia merger was from network efficiencies — half of which would be from Malaysia. For that kind of gains for Celcom, the alternative to Digi.Com Bhd could only be Maxis Bhd rather than Telekom, which is a fixed-line broadband player with only five million customers compared with nine million at Celcom and 12 million each at Digi and Maxis.

More importantly, both Digi and Maxis are far more profitable compared with Celcom — Digi’s FY2018 profit was twice that of Celcom’s RM784 million for the same year while Maxis’ was 2.3 times or about RM1 billion more. Celcom also makes a lot less money, on average, from each customer compared with Maxis and Digi.

Thanks to sizeable writedowns as well as losses in Indonesia and Bangladesh in FY2018, Axiata’s normalised group earnings last year were below that of Digi and Maxis.

Digi paid about RM1.5 billion dividend to shareholders in FY2017 and FY2018 while Axiata’s payout was RM767 million and RM862 million respectively. Maxis’ absolute dividend payout was about RM50 million ahead of Digi.

“If one is looking for money, one might as well marry the rich mother rather than the daughter with a rich mother, right?” was Jamaludin’s light take on investors’ love for dividends and how telecoms companies’ valuations are driven by that.

Unlike Maxis and Digi, which generate sizeable free cash flow that is being paid out as dividends, the profits that Celcom generates need to be weighed against the cash needs of other Axiata units — an extra barrier that reduces the dividend haul. That also explains why Axiata’s market capitalisation had periodically fallen below that of Digi and Maxis, and was about RM5 billion below that of Maxis and just RM2.8 billion above that of Digi at last Friday’s close.

Yet, Jamaludin says an alternative plan had always been there to excite investors and long-term shareholders in case the desired mega merger fell through, like it did. Celcom, he says, has been “stabilised” and is focusing on increasing profitability rather than chasing market share.

Given where global interest rates are going, Axiata’s 67%-owned tower unit edotco is the desired bride of many. A good M&A deal or pre-IPO monetisation for edotco or one of its digital units could show investors that these units are vastly undervalued, Jamaludin says.

With Axiata still on friendly terms with Telenor, other deals could still happen with Digi, including the potential of enlarging edotco’s portfolio with the latter’s towers, Jamaludin acknowledges, even though no talks are currently ongoing.

None of the big players is desperate at the moment, even though the decline in profits has been showing across the industry for several years now, especially in Malaysia. The lack of a sizeable growth trajectory in its home market means that a merger is probably the fastest, if not the only, way to double Celcom’s profit and significantly slash costs.

Jamaludin, who has been expecting mergers to happen for at least three years now, still thinks they need to take place for the long-term sustainability of the industry. New technology like 5G has promise but is still unproven when it comes to providing sizeable returns on the sizeable investments required, he adds. Yet the pressure to invest in 5G might well nudge players to the M&A table again.

When asked if he is excited enough about Axiata’s prospects and his ability to deliver growth, and be willing to take a pay cut today in return for the prospects of higher future reward when key performance indicators are met, Jamaludin says yes without hesitation.

With news of his counterpart in Singapore Telecommunications Ltd taking a pay cut grabbing the headlines just a few months back, the issue of salary may well crop up soon with Jamaludin’s contract up for renewal. By the time his current contract expires in early March next year, Jamaludin would have completed his 12th year at Axiata — longer than his decade at Maxis from 1997 to July 2007. Whatever happens, investors are certain to be watching developments closely.  

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