AXIATA (FV RM7.02 – NEUTRAL) Stock Pick: Attempting New High

Axiata  remains  our  preferred  telco  exposure  due  to  the  bright  earnings  prospects of  its  regional  mobile  footprint,  strong  operation  execution  and  headroom  for capital  management.  We  expect  the  group  to  comfortably  meet  its  revenue  and EBITDA  KPI  targets  for  FY12,  spurred  by  solid  showing  from  Celcom,  and  despite the  weaker  numbers  from  its  Indonesian  unit,  XL  Axiata.  The  key  share  price  re-rating  catalysts  are:  (i)  a  stronger-than-expected dividend  payout  in  FY13,  and  (ii) an earnings upside surprise. We are NEUTRAL in view of the less than 10% upside to our sum-of-parts (SOP) FV of RM7.02.  

Blue  camp  leads  the  pack.  Celcom, Axiata’s wholly-owned  mobile  unit  in  Malaysia, continued  to  execute  well,  with  revenue  and  EBITDA  growth  trumping  both  Maxis  and Digi’s.  The  solid  performance  so  far  has  been  attributed  to  Celcom’s  successful customer  segmentation  strategy,  strong  non-voice  data  take-up  and  initiatives  to rejuvenate voice traffic. After ceding revenue share to its peers over the past five years, Celcom has  made  a comeback  and has  now  taken  the  lead  in  the  youth  segment.  It is also  making  strong  inroads  into  the  mid-urban  and  suburban  areas.  Another  leg  up  for the  celco  going  forward  would  be  the  improved  wholesale  revenue  from  MVNOs  and new 4G player, Puncak Semangat, which management said it is in talks with.      

Cementing  footprint  in  Cambodia.  Axiata’s  recent  move  to  merge  its  telco  in Cambodia (Hello) with the second largest operator, Smart Mobile, is logical and timely in order  to  strengthen  its  position  in  a  crowded  and  hyper-competitive  market.  While  the implied  valuation  of  >10x  EV/EBITDA  is  steep,  we  believe  this  is  justified  by  Smart’s strong  market  share  gains  over  the  last  two  years.  The  deal  is  EPS  positive  from  the outset (+1%-2% for FY13).

Replete  with  cash.  Axiata  is  targeting  to  progressively  raise  its  dividend  payout  over time (management has maintained its dividend payout at 65%). As the group is likely to adopt a disciplined approach toward M&As amid a rapid build-up in cash, we do not rule out the potential of a special dividend going forward. We are projecting for Axiata’s FCF yield to rise to 10%-11% for FY13/14 from 7% in FY12.

Key  risks.  The  risks  to  our  forecast  are:  (i)  lower  than  expected  EBITDA  margin  at Celcom  and  XL  (collectively  over  80%  of  group  EBITDA)  and  (ii)  higher  than  expected capex. Management has raised its capex guidance to RM5bn following the release of its 3Q/9MFY12 results as XL is front-loading its FY13 capex to 4QFY12 to position for the anticipated strong growth in data in Indonesia.

Source: OSK