Investment Highlights

• We maintain HOLD on Axiata Group (Axiata) with a higher SOP-based fair value (FV) of RM2.95 (vs. RM2.23/share previously) to incorporate the higher market valuation of XL Axiata. Our fair value implies FY24F EV/EBITDA of 5x, in line with its 5-year average. Our FV reflects a neutral 3-star ESG rating.

• Axiata’s 89%-effectively-owned PT Link Net (Link Net) in Indonesia is considering raising capital up to $500mil to accelerate its fibre rollout through a combination of both equity and borrowings, as guided by management. At this juncture, the plan is still at an early stage and no breakdown has been disclosed.

• Recall that Axiata is driving a structural transformation of 66.2%-owned PT XL Axiata (XL) and Link Net. As part of its delayering strategy, the group plans to transform XL Axiata as a service company (ServeCo) and Link Net as a wholesale fibre company (FibreCo).

• Back in 2022, Axiata Investment Indonesia (AII) and XL both acquired Link Net at an enterprise value (EV) of US$1.1bil, paying a consideration of US$900mil (RM3.9bil). Currently, Axiata Investment owns 76.4% of Link Net’s equity and XL 19.2%.

• In June 2023, XL entered into a lease agreement with Link Net for fibre-to-the-home (FTTH) service where the company will build, operate and maintain 1mil home passes to be used by XL’s customers, and is slated to be completed in 2QFY24.

• Link Net also entered into a non-binding agreement to transfer its 750,000 fixed broadband customers to XL and roll out an additional 2mil new homes passes, enabling the group to deliver fixed broadband and mobile convergence services to a wider Indonesian community. However, the exercise is subject to OJK’s (Otoritas Jasa Keuangan) approval, expected to be completed by 1HFY24.

• According to management, the US$500mil fundraising will be conducted in phases, tied to the capital expenditure requirement for the home passes roll out. Link Net aims to roll out 8mil of home passes over the next 5 years from a strong existing base of 3.2mil home passes.

• We believe this capital injection will be supportive of 2mil new home pass additions on top of the ongoing 1mil home pass plan for XL’s customer. The effort is pertinent in accelerating Indonesia’s fixed broadband growth from Indonesia’s low household penetration rate at 15% currently, behind Bangladesh’s 25%, Philippines’ 34% and Malaysia’s 37%.

• If Link Net were to raise US$500mil relying solely by selling Axiata’s shares, Axiata could lose its entire stake given that Link Net’s market cap is only US$200mil currently as its share price has plunged 59% from 31 December 2022. Based on annualised 9MFY23, Link Net’s EV/EBITDA is lower at 4.8x currently than the acquisition valuation at 6.9x.

• We view that Axiata Group and XL would be unlikely to choose to cease owning a majority stake in Link Net as that would hinder Axiata’s structural transformation plan for its Indonesian operations. Assuming Axiata were to sell a 39% equity stake in Link Net to retain a controlling 50% stake for a consideration of US$78mil cash (based on current market price), Axiata’s exposure to Link Net’s 9MFY23 loss of IDR274bil could improve the group’s PATAMI by an estimated 6%, while mildly improving its FY24F net debt/EBITDA to 1.97x from 2.03x currently.

• Nevertheless, we positively view Axiata’s intention to raise fund by selling a part of its stake in Link Net, which could also mean securing external funding sources and reduce a dependance on Axiata to fund the Indonesian operation’s growth.

• Going forward, however, we are cautious on Axiata’s prospects as the group’s finance cost would still increase due to additional debt financing for Link Net’s fibre rollout, digital banking start-up losses and capex expansion of edotco in Phillipines.

• Affordability pressures experienced by end-consumers due to the inflationary environment also may cap revenue growth potential.

• Hence, from a valuation perspective, the stock looks fairly valued trading at 5x EV/EBITDA, at parity to its 5-year historical average, especially given potential near-term downside earnings risks.

Source: AmInvest Research - 9 Feb 2024