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Monday, February 27, 2017

Is the worst over for Axiata?

Saturday, 25 February 2017

Axiata is raising capex from RM6.1bil in 2016 to RM6.6bil this year, though it has enough cash to fund that.

IN 170 days, Gio, the hottest mobile brand in India, gained 100 million subscribers and that has sent shivers down the spine of its rivals.

Its rivals are trying hard to fend off competition but the smart phone population is lured by free calls, SMS and data offered by Gio. The space is supposed to change as Gio, owned by Reliance Group, will start charging from April 1.

Gio is the brainchild of one of India’s richest men, Mukesh Ambani. He ploughed in more than US$25bil on an assault on the country’s telecoms sector.

That has also led to the biggest player, Bharti Airtel (250 million subscribers) buying over Telenor’s operations in India, which it announced on Thursday.

Bharti’s move signals consolidation in the world’s second largest mobile market. Talks are also progressing for the second and third player - Vodafone and Idea Cellular to merge.

If it happens, Axiata Group Bhd president and group CEO Tan Sri Jamaludin Ibrahim says the biggest mobile company will be created. It will have 400 million subscribers, half that of China Mobile, the world’s biggest in users.

India has 1.12 billion mobile subscribers as at November.

Axiata’s stake in Idea has not earned it much in recent years because of intense competition but a merger may also cause a dilution in its stake.

“We think a merger will see Axiata’s stake dilute to below 10% in the merged entity, relegating the entity from an associate to an investment. We thus think a divestment is likely, which should help lower net debt/Ebitda from 2.1x to 1.3x,’’ says a foreign research house in a report.

Another analyst says “the divestment of its Idea stake should put leverage concerns to bed and allow higher dividends.’’

Will Axiata sell its stake?

Jamaludin says “we will stay, even without Vodafone.... its so dynamic. It has been our best performer (before), why leave?

“We know it is extremely competitive, it will balance out and we want to be with our partners in India,’’ says Jamaludin.

Jamaludin adds that there are no plans to exit, reduce or raise stakes in the markets they are in.

Apart from Idea, Axiata owns Celcom Axiata Bhd in Malaysia, has 66.4% in Indonesia’s XL Axiata, Sri Lanka (Dialog 83.32%), Bangladesh (Robi Axiata 91.59%), Cambodia (Smart 95.3%), Nepal (Ncell 80%), Singapore (M1 28.32%), and Pakistan (Multinet 89%).

The work is pretty much cut out for the year - to grow the business in the right segments across all markets, some more difficult than others amid competition, keeping a tight lid on costs, a check on currency volatility, forking out more money in capital expenditure (capex) and spectrum auctions/acquisitions.

In Indonesia, Jamaludin says the focus is to expand beyond Jawa, into Kalimantan, Sulawesi and Sumatra and get aggressive in the middle segment of the market, where real growth is. To do that, it needs to share networks with other players to save cost, and also expand where it needs to. It needs to work on better deals, refresh the brand and team. XL has a new chief marketing officer.

“We need to offer a different game plan for our vendors.... something drastic as we want to capture growth where it is. All these efforts should increase revenues this year,’’ Jamaludin says.

Bank of America Merrill Lynch, in a report, says “these steps are expected to deliver stability in 2017 and low-single-digit operational growth thereafter. For XL, we see monetising data as a key growth driver. Further, the balanced approach between traditional and modern distribution channels and distinct brand identities for XL (mid-end) and Axis (low end) should help in improving its subs base in the coming quarters.’’

The other mammoth task is to clean up Celcom as one million users have left, net profit is down to RM976mil from RM1.3bil in 2015.

Jamaludin and Celcom group CEO Michael Kuehner’s biggest challenge is to get the 3,700 workforce to be more productive and bring to market what users want, besides revamping its entire network, which is being done in stages.

“This year is about stabilisation, we cannot solve everything (so soon), we need one year.

“However, we are seeing some positive signs since the last two quarters. We expect Celcom to grow faster next year and expect better revenues then,’’ Jamaludin adds.

However, Normura Research cautions that with “pricing pressure, revenue growth may not be easy, we think.” On Thursday Axiata released its results, disappointing to some, and surprised the market with lower dividends. This prompted several research houses to revise their earnings outlook for 2017 and 2018.

Dwindling dividends

It announced dividends down from 20 sen in 2015 to 8 sen in 2016, and expect the same range in 2017. The dividend payout ratio (DPR) is down to 50% from 85% but Jamaludin says they will go back to the 2015 levels of DPR in 2018.

This led to a 51 sen drop in its share price over two days, with its share price closing at RM4.29 yesterday.

“Axiata now offers a dividend yield of only 2% for the next 2 years compared to 3%-4% for Digi.Com Bhd and Maxis Bhd,’’ says Ambank Research. BNP Paribas Research says “based on our FCF projections, we think there is sufficient headroom for Axiata to revert to an 84% dividend payout in 2018.’’

Axiata rationale for lower dividends was to conserve cash because of currency volatility, funding for future spectrum and the need to spend more to grow in the markets it is in. It is raising capex from RM6.1bil in 2016 to RM6.6bil this year, though it has enough cash to fund that.

But as Jamaludin puts it, “we need to be prudent.’’ The upcoming spectrum auctions/sale/acquisition expected in 2017-18 are 2600MHz, 2300Mhz and 700Mhz in Malaysia, Bangladesh (1800, 2100, 700), Cambodia (2600, 700), Nepal (700, 2600), Indonesia (2100) and several blocks in India. Cost cuts are a priority to bring cost down as it needs to be efficient in competitive markets where margins are thinning though data is booming. But data prices are also coming down.

He says the group was working towards group-wide cost management to improve profitability and RM800mil operation expenditure and capex savings are built in our 2017 plan, as well as aiming for RM1.5bil in additional savings in 2018 and 2019. That cost savings is expected to be ploughed back to grow the business.

Axiata’s net profit for full year 2016 was down by 75% to RM504mil from RM2.5bil in 2015. This was led by the weak ringgit against the US dollar, and its forex loss totalled RM685mil, due to its exposure to the US dollar from its acquisition of an 80% stake in Ncell Pvt Ltd in Nepal.

Revenue was up 8.5% to RM21.5bil from RM19.9bil.

Its earnings before interest, tax, depreciation and amortisation (Ebitda) grew 10% to RM8bil in 2016, while margins stood at 37.2%. Earnings per share for the full year was at 5.7 sen, down from 29.5 sen. Affin Hwang Capital Securities says “even after stripping out forex losses, Axiata’s 2016 results came in 16% below our expectations despite our forecast being 14% below street.’’

Axiata has RM22.3bil in debts, 55% in US-denomination and the rest in other currencies. Of the 55%, 25% is hedged.

But for 2017, Jamaludin is looking at headline KPI of 9-11% for revenue and 7-9% for Ebitda growth, but analysts say there are headwinds in all markets which Axiata has to ride through from currency woes, competition and regulatory risks. Still, Celcom targets to close the gap in first half and grow in the second half, XL expects to grow revenue in line with industry; mid-single digit growth at Dialog and Ncell and double-digits at Robi.

Several analysts have lowered their 2017 and 2018 net profit forecasts, with UOB Kay Hian reducing 2017-18 net profit forecasts by 21% and 6.7% respectively, Public Investment Bank cutting its 2017-18 earnings forecasts by 17-18% to factor in lower contributions from Malaysia, Indonesia and Bangladesh and a higher share of associate losses in India.


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