Celco maintains consistent growth ;).
By LEONG HUNG YEE
AXIATA Group Bhd has managed to maintain a consistent growth story. Apart from its ability to maintain its EBITDA (earnings before interest, tax, depreciation and amortisation) margins above 40% in the past four quarters, Axiata will also be able to pay dividend from next year.
On top of that, its share price has risen more than 30% year-to-date, outperforming the benchmark FTSE Bursa Malaysia KL Composite Index. Axiata started the year with RM3.07, its lowest so far for the year on Jan 4, and has since been on an uptrend. On Friday, the counter closed at RM4.11.
“We like Axiata for its attractive blend of regional mobile assets. It’s a regional growth story,” an analyst says, adding that the telco is trading at an attractive price earnings ratio (PER) of 13 to 14 times against its peers at 16 to 19 times.
Indonesian youths walk past an advertisement for mobile phones during the Indonesian cellular show in Jakarta recently. Axiata is a big player in that market. — Reuters
“We like its continued focus on improving operations, although the upside from this may fall short of present sky-high market expectations. Axiata has mentioned that the balance sheet is now in healthy shape, and a dividend policy may be announced soon,” another analyst says.
Inter-Pacific Research Sdn Bhd has an outperform call on Axiata with its fair value pegged at RM4.52 based on sum-of-parts (SOP) valuation method which translates into a PER off 14.4 times based on FY10 EPS of 31.45 sen.
“Our optimism is due to its regional growth potential coupled with dividend policy expected to be announced in the third quarter and improving margin from active cost management and network efficiency programmes,” it says.
A local bank-backed analyst believes Axiata may not be the choice for dividend play as yet as it needed to fund its growth. However, he says Axiata presented investors with regional exposure and is a proxy to Indonesia’s growth story.
MD, president and group CEO Datuk Seri Jamaludin Ibrahim says the group will be announcing a dividend policy by the end of the current quarter.
He says Axiata is currently a growth-based company but eventually it may also turn into a dividend-play stock.
He did not disclose more information on the dividend plans but said companies generally give out some 30% of their profits as dividends to shareholders.
“We believe Axiata’s dividend policy will not match DiGi’s 80% and Maxis’ 75% respectively due to the need to fund operating companies and focus as a growth stock instead of being a dividend yielding stock,” Inter-Pacific says, adding that it expects Axiata to pay out 15% of its FY10 EPS and subsequently adopting a dividend payout of 30%.
MIMB Investment Bank views Axiata’s plan to announce its dividend policy and sell as much as RM4.2bil of Islamic bonds to refinance existing debts as very positive to attract new investors, especially the traditional dividend-paying and bonds conservatives.
“Given the current cash level, we think there is a good probability of getting a good dividend yield of 4%-5% by end-2010,” it says.
Since its listing back in April 2008, Axiata has chalked up a steady performance, showing improvement quarter after quarter.
For the quarter to March 31, Axiata charted a 30.9 % rise in turnover to RM3.8bil from RM2.91bil previously. Earnings per share rose to 11 sen from 1 sen before.
Its EBITDA was up 52% to RM1.7bil while EBITDA margin improved by 6.1 percentage points to 44%.
Despite the stiffer competition, analysts say the EBITDA margin is still healthy, although it is being squeezed.
“Axiata’s EBITDA margin is poised to improve gradually from 39.3% in FY09 to 44% in FY10 with margins to remain at 44% in FY11 and FY12.
“Our positive view on Axiata’s EBITDA margin is due to their active network efficiency programmes, cost optimisation and customer retention programmes which are executed across operating companies,” Inter-Pacific says.
Celcom Axiata Bhd and PT XL Axiata Tbk (XL) combined contributed 83% of revenue and 89% of EBITDA in the first quarter.
A year ago, XL contributed only 31% to the group’s revenue and EBITDA respectively. To date, the Indonesian telco has overtaken Celcom’s contributions in terms of EBITDA. XL currently contributes 39% and 46% to group’s revenue and EBITDA respectively against Celcom’s 44% (revenue) and 43% (EBITDA).
For its first quarter ended March 31, XL’s revenue and EBITDA were up 42% and 92% to 4.2 trillion rupiah and 2.1 trillion rupiah respectively year-on-year.
Jamaludin expects XL to overtake Celcom and be the main revenue earner going forward.
“We expect XL to overtake domestic operations in terms of revenue within the next three to five years,” he says, adding that some 45% of its revenue and 80% of net profit currently derived from domestic operations.
Commenting on its financial target for the year, he says the group targets a “low to mid-teens” target for revenue while “low-teens” for profit.
According to the group’s headline key performance indicators for 2010, Axiata is aiming to grow revenue by 12.1% this year and raise EBITDA by 14.1%.
“The future source of growth geographically is outside Malaysia and in terms of products it is mobile broadband,” Jamaludin says, adding that the high speed broadband (HSBB) would affect its business to some extend.
He says more users are becoming nomadic users while data usage has surged over the past couple of years.
Analyst concur with Jamaludin. They say data and broadband business will be the key drivers for telcos. However, they say the playing field is getting even crowded these days with not just 3G operators but also WiMAX and 4G players.
An analyst says the blended average revenue per users (ARPU) of all three telcos, Maxis, Celcom and DiGi has dropped last year, therefore operators will have to find ways to stop it from sliding further.
Jamaludin expects data usage to grow further due to the availability of various and newer smartphones in the market.
Over the last two years, social networking such as Twitter and Facebook have grown from nowhere to be among the largest applications, he adds.
Mobile data currently contributing some 30% to the group’s revenue and is expected to rise further in the next three to five years.
“We can’t grow as much as before for voice, so mobile data will help us to mitigate,” Jamaludin says.
He adds that going forward, Axiata would focus on sustainable performance with emphasis on revenue growth opportunities including mobile broadband.
It will also continue its diligence on cost management and capital expenditure (capex) efficiency. The group has also announced RM3.6bil in capital expenditure for this year to support Celcom as well as its operating companies in Indonesia (XL), Sri Lanka (Dialog) and Bangladesh (Robi).
Axiata currently has cash and bank balance of RM2.85bil as at March 31.
Inter-Pacific says Axiata should be comfortable enough to generate its expected capex of RM3.6bil internally out of which RM1bil is for Celcom.
“With the sales from XL shares, Axiata cash balance should balloon to above RM4bil. The issuance of RM4.2bil sukuk should provide some breathing room to its cash usage as it will be used to refinance its existing debt which is due to mature in two years’ time and at the same time hedging their position against increasing rates,” the research house says.
On its debt level, Axiata has managed to strengthen its capital structure with further deleveraging of balance sheet with lower net debt over EBITDA at two times in FY08. Its net debt over EBITDA was 3.8 times in FY08.
Meanwhile, MIMB Investment says the recent tie-up between Celcom and DiGi to collaborate on network and infrastructure sharing is encouraging as it may result in more joint venture in other areas.
“We are positive on this development as any cost reduction will help boost Axiata’s margins which are already under pressure due to cut- throat competition.”
Despite the strong capital appreciation, Jamaludin says its market capitalisation was relatively lower than that of Maxis.
“Axiata is undervalued for sure,” he says.
Given the demand from dividend seeking investors, Axiata’s price is likely to have more upside in the medium term.
“We believe Axiata should be a good strategic exposure to regional telecoms,” MIMB says.
On the cut on mobile termination rates and fixed termination rates, possibly by up to 40.2% and 17.6% respectively to converge around 5 sen per min, it is likely to dent Axiata’s revenue a little but not as much as Maxis.
Analysts believes Maxis would be the most affected given its large subscriber base, but the impact on Axiata should be minimal.
Who said? The Star said😉.