AXIATA plans to moderate its capex intensity to derive higher asset returns. It has also unveiled the transformation of Link Net into FiberCo to capture future growth opportunities. However, this may be a cost drag in the near term during the gestational stage. We maintain our forecasts, TP of RM3.10 and OUTPERFORM call.

We came away from AXIATA’s Analyst and Investor Day feeling largely neutral as its ambitious growth plans are counter-balanced by high funding requirements. The key takeaways are as follows:

Still aims for sustainable dividends. AXIATA aims to be a “multi-platform builder” to achieve its aspiration to be a sustainable dividend company. The platforms comprise: (i) digital telco (XL, Robi, Dialog, Smart, CDB), (ii) infrastructure (edotco and Link Net), and (iii) digital business (Boost, ADA, Axiata Digital Labs). Hence, this will enable the financial outcome of: (i) DPS of at least 10 sen p.a. (FY22: 14 sen), (ii) high single-digit annual shareholders’ return (FY22 ROE: 5.3%), and (iii) net debt/EBITDA of 2.5x (FY22: 1.1x). The various strategies identified by the group to realize its targets includes (amongst others): (i) reduce HoldCo costs by circa 20% to end up with a smaller AXIATA HoldCo, (ii) rebalance loans at frontier markets to reduce USD exposure, (iii) pare down debt over 2024-26, and (iv) monetize infrastructure and digital businesses in 2025-26.

Optimizing capex intensity. AXIATA is on track with its plans to evolve from a pure (legacy) telco to Telco-TechCo. One of the main targets under this strategy includes capex and opex savings from a reduction in cost/GB. Hence, this is expected to address the current trend afflicting telcos globally - where earnings growth lag behind capex investments. In other words, this implies that telcos are not deriving sufficient returns on their capital. Therefore, AXIATA targets to reduce its capex intensity for digital telco opcos to below 20%. In contrast, based on current traction, AXIATA’s forecasts that its mobile network capex would exceed 20% by 2026. As such, instead of growing network capex rapidly in the coming years, AXIATA plans to keep it flat. In particular, AXIATA targets to achieve data margin of USD10 cents/GB by 2025.

Capex should correspond to returns. AXIATA’s high capex intensity of 25% is attributed to low ARPU of USD2.3 derived from its Opcos at frontier markets. In comparison, as an illustration, T-Mobile group’s capex intensity is merely 18% given its significantly higher ARPU of USD10.6. Moreover, there is no compelling reason for AXIATA to upgrade its capex, given that it is unable to monetize higher speeds from its customers. Therefore, AXIATA plans to build a competitive network that is aligned to its customers’ needs of: (i) consistent and reliable experience, and (ii) value for money telco services.

Delayering Link Net to transform it into Fiberco. AXIATA revealed the structural transformation of XL and Link Net which entails: (i) transfer of Link Net’s 750k residential subscribers, and (ii) roll-out of an additional 2m new homes passes by Link Net for XL. This is aligned with the group’s delayering strategy where XL becomes a ServeCo and Link Net transforms to a FiberCo. As ServeCo, XL will offer fixed-mobile converged offerings, whilst as Link Net as FiberCo will focus on delivering 8m home passes to XL by 2026 (2023: 3.4m). The other layers within Link Net, comprising EntCo (provision of enterprise solutions) and MediaCo (media/content product offerings) remain status quo for now.

Growth does not come cheap. Indonesia’s low fixed broadband penetration of 15% (Malaysia: 48%) is attributed to significant supply deficit. Evidently, the largest fixed player, Telkom, merely has 37m home passes as at end-2022 whereas Link Net as the second largest player, trails behind with 3.4m. In contrast, internet penetration (mainly via mobile) at Indonesia is substantially higher at 78% in 2022-23. These market gaps translate to growth opportunities for XL and Link Net. Therefore, moving forward, Link Net will further transform into a wholesale player that provides open access to other internet service providers aside from its anchor tenant, XL. On the flipside, roll-out of these gestational fiber assets requires substantial capex. This is evident from FiberCo’s expectations that it will require peak funding of USD500m-USD600m in 2026 to deploy 4m home passes. Therefore, AXIATA has plans to rope in investors in the future to fund Link Net’s growth plans.

Forecasts. Maintained.

We also maintain our Sum-of-Parts TP of RM3.10 (refer below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like AXIATA for: (i) its plans to deleverage and strengthen its balance sheet, (ii) growth prospects for OpCos at emerging markets, and (iii) strong asset monetization prospects for edotco and its digital businesses. Maintain OUTPERFORM.

Risks to our call include: (i) a strong USD may weigh on the performance of its OpCos at frontier markets (e.g. Robi Bangladesh Dialog Sri Lanka, Smart Cambodia, Myanmar tower assets), (ii) further interest cost drag from continuous rate hikes, and (iii) macro headwinds weighing on Opcos at emerging markets.

Source: Kenanga Research - 7 Dec 2023