Chasing Regional Opportunities
In a directional change, the consolidation of Link Net in Indonesia, edotco’s regional
expansion and positive EBITDA for the digital business (Boost) will drive a three-year
earnings CAGR of 8%. A successful integration of Link Net may further drive earnings
and winning a digital banking licence can add up to 1.5% to current market
capitalisation. The Digi-Celcom merger is currently addressing competition concerns.
Maintain BUY. Target price: RM4.45.
WHAT’S NEW
• Chasing growth in Indonesia, tower and digital businesses. In a recent meeting,
management guided for a directional change for Axiata – aiming to grow the business post
the potential merger of Digi and Celcom. Key drivers are: a) consolidation of Link Net in
Indonesia, b) the enterprise business that accounts for 20% of group revenue, c) edotco’s
regional tower expansion – organic and inorganic (ie M&A), and d) the growing digital
businesses. In addition, Axiata is maintaining its target of achieving a 20 sen/share dividend
payout by 2024 with Celcom driving a huge chunk of the cashflow. We project a three-year
earnings CAGR of 8%, suggesting room for upside as Axiata focuses on growing its regional
businesses.
• Link Net: Convergence opportunity for XL Axiata. Axiata and XL had in Feb 22 proposed
to acquire a 66% stake in LINK Net Indonesia at 6x forward EV/EBITDA. Our earnings
scenario suggests that the successful acquisition of LINK may lift Axiata’s 2023 (maiden fullyear contribution) by 3% (46% direct stake in LINK) and 5% (assuming Mandatory Take
Over (MTO) takes place – equivalent to an 80% direct stake for Axiata). A more pronounced
earnings uplift is possible given synergetic opportunities between LINK with Axiata and XL
including: a) backhaul infrastructure sharing (spectrum fees, sites rental), b) product crossselling/bundling between XL and LINK, c) centralised procurement, and d) sharing of talent
pool/ expertise.
• Digital banking licence a boon for Axiata. Axiata partnered RHB to bid for a digital
banking licence (DBL) in Malaysia. We expect the announcement of DBL winners sometime
in mid-22. Our current valuation has not imputed the potential digital banking licence win.
Our back-of-the-envelope calculation suggests that winning the digital banking licence can
potentially add RM500m to market capitalisation (or 1.5%) based on 5x price/sales of
Axiata’s 60% stake in the Axiata-RHB consortium. Boost wallet will remain the distribution
platform and investments will be required for development of back-end infrastructure.
STOCK IMPACT
• Celcom is expected to continue its positive momentum into 1H22… To recap, Celcom
grew its subscriber base by 2% or 215,000 customers, with the bulk of it coming from the
prepaid segment. Additionally, blended ARPUs were stable at RM45/month – suggesting
benign market competition and better execution in Celcom. Earnings were further boosted by
improved credit management and lower finance cost. We expect this trend to continue into
1H22.
• …but a challenging quarter for Dialog and NCell. We expect Dialog to face more
challenges given the economic turmoil and social unrest situation in Sri Lanka, but
management guides that impairment is unnecessary as the carrying value is small. Axiata
may step in to offer a short-term credit as financing liquidity dries up in Sri Lanka. NCell
continues to face difficulty in monetising data as fixed broadband remains relatively cheap.
EARNINGS REVISION/RISK
• 2022 earnings guidance. For 2022, Axiata guided for a mid-single digit growth in revenue
(2021: 7% yoy) and a high single-digit growth for EBIT. The guidance has not included the
synergies of a successful completion of the Celcom-Digi merger and the acquisition of Link
Net in Indonesia.
• Risks include: a) regulatory challenges, b) lower-than-expected dividend payout, c)
increased taxes in Sri Lanka and Malaysia, and d) geopolitical tension in Sri Lanka and
Myanmar.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged SOTP-based target price of RM4.45. Our target price
implies 4.6x 2022F EV/EBITDA, 1SD below its five-year mean valuation of 6x. The stock
offers a 2.6 to 5.0% dividend yield for 2022-24.