Axiata Group - Catch-up play, under-leveraged balance sheet suggests surprise catalysts BUY

- We re-affirm our BUY call on Axiata, with a higher fair value of RM6.70/share (vs. RM5.90/share previously). We reduce the discount to our SOP valuation from 10% previously to 5%, given Axiata’s status as a high Beta telco which positions it strategically in the sector amid a liquidity-driven market.

- More importantly, Axiata’s balance sheet is under-leveraged. This positions the group strategically to spring surprise catalysts, including tapping on acquisitive growth opportunities in the region. The group entails a huge equity base (RM22bil) and a net gearing of only 18% (net debt to EBITDA: 0.5x), one of the lowest among regional telcos. 

- Assuming an optimal net gearing of 40%, we estimate Axiata can raise RM4.5bil-RM5bil for M&A opportunities or capital management initiatives. Any debt raising programmes in the near term is a step towards underpinning our thesis. While amounts raised might be utilised to refinance existing debts, we note that only Robi (Bangladesh unit) entails near-maturity debts (due in October 2012), which amounts to just US$130-US$140mil (RM400mil-RM440mil).  

- Operationally, Axiata’s voice resuscitation effort is bearing fruit – Axiata’s 1Q12 saw voice revenue growth of some 7% YoY compared to Maxis’ -2% YoY. We see this as a catalyst for earnings outperformance and potential upgrades. Given that voice entails much higher margins than data, such measures should support group margins despite intensifying competition at the lower-end mobile segment where Maxis and U-Mobile are aggressively trying to wrest market share from DiGi, a dominant player in the low-end segment.

- Additionally, Axiata is positioned as the only local proxy to regional growth, particularly Indonesia which is experiencing robust data growth. Reflecting such growth, data subs in Indonesia (for XL) grew 50% YoY in 1Q12 and accounts for 60% of total subs, suggesting still significant room to grow. Advanced data revenue saw some 71% YoY growth during the period, far exceeding local telcos’ advanced data growth of 5%-10% in the period.

- Axiata is a laggard in the sector – Maxis and DiGi have seen their share prices appreciate by 31%-57% in the past 12 months versus Axiata’s +20%. We see room for Axiata to outperform peers in the next 6 months, particularly considering peers’ inflated valuations and Axiata’s strategic position to spring surprise catalysts off an under-leveraged balance sheet. 

- Furthermore, we see potential room for dividend surprise – one of the factors for Axiata’s underperformance is its lack of dividend commitment. Axiata is the cheapest local mobile telco trading at 7x FY12F EV/EBITDA. In comparison, Maxis and DiGi trade at 12x and 11x, respectively. Any surprise on the dividend front arising from abundant retained earnings to capitalise on and an under-leveraged balance sheet should serve as a strong share price catalyst. 

Source: AmeSecurities