Operational efficiency expected to be one of Axiata’s key focuses

Axiata Group Bhd (Dec 3, RM4.18) Maintain trading sell with an unchanged target price of RM4: At its 2019 Analyst and Investor Day, Axiata Group Bhd highlighted its focus on creating a sustainable cost structure, achieving customer satisfaction and building its digital and analytics resources by 2022. For 2017 and 2018, Axiata’s aim to deliver on cost-savings, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin and capital expenditure (capex) intensity was largely on track.

Specifically, its cost-savings target of RM5 billion by 2021 has seen 71% or RM3.6 billion achieved thus far. Despite this, we note the group’s bottom line did not expand in tandem with these targets. The compound annual growth rate (CAGR) for normalised net profit — based on an annualised first nine months of financial year 2019 (9MFY19) — for FY16 to FY19 forecasts is estimated at -13%.

Axiata’s operating environment locally and abroad has been challenging, dragged by intense competition, rising costs and unfavourable regulatory policies, among others. We expect these challenges to continue in FY20 forecasts, albeit in a less intense manner. Our “trading sell” rating is maintained for Axiata as we remain wary of a provision risk arising from its tax liability in Nepal, not reflected in our forecasts.

Assessing Axiata’s past performance against its targets, it has delivered cumulative cost-savings totalling RM3.6 billion since 2017, with the remaining RM1.4 billion to be achieved by 2021. Its Ebitda margin also improved by 290 basis points (bps), ahead of its target. However, we believe this was partly attributed to adopting new accounting standards. Meanwhile, its targeted capex intensity of below 20% is on track with year to date 2019 improving to 23.9% (-20bps) despite aggressive investments in Indonesia and Bangladesh.

By 2022, Axiata is targeting to reduce the cost per gigabyte through a more efficient network utilisation, expand aggregated buying of equipment, digitisation and a continuous reduction of capital intensity. By resorting to digitisation and analytics, Axiata aims to optimise capex without compromising on customer experience. With video traffic — YouTube and Facebook — contributing to about 60% of the total data traffic, Axiata’s network expansion will be optimised towards consistency, latency and upload speed. All said, a sustainable cost structure and operational efficiency will be the group’s key focuses going forward.

Thus far, Axiata’s profit growth has not been satisfactory, recording an estimated CAGR of -13% for FY16 to FY19 forecasts, based on the annualised 9MFY19. Its operating units in Sri Lanka, Nepal and Malaysia were dragged by intense competition, rising costs and unfavourable regulatory policies, among others, though a better performance achieved in Indonesia, Cambodia and Bangladesh provided a reprieve for the group. We remain wary of investment and regulatory risks for its overseas operations, particularly in Nepal due to the disputed tax liability. — PublicInvest Research, Dec 3

Source: TheEdgeMarkets