Axiata Group Bhd
(Aug 11, RM4.25)
Maintain buy at RM4.30 with higher fair value RM6 (from RM5.05): We reaffirm our “buy” call on Axiata Group Bhd and raise our fair value RM6 (against RM5.05) on revision of its sum-of-parts valuation by 19%, to account for significant adjustments in XL and Dialog. XL outpaced Celcom in earnings growth and is set to match contribution by FY2012.
With that, our earnings estimate for FY2010 and FY2011 is revised to 33.7sen per share (against 28.8sen per share or 17%) and 45.8 sen per share (against 39.8 sen per share or 13%) respectively.
Our main investment theses on the group: (i) Stronger than previously estimated growth at XL and Dialog — flowing in from significant revenue growth and margin expansion; (ii) Dividend surprise in store; and (iii) An attractive valuation for a company with operations in high growth, under-penetrated countries.
XL came ahead in 1H2010 and may gain traction because of impressively strong data and value added service (VAS) revenue. It leads other players in its ratio of data and VAS to voice, at 0.68 times (against Indosat’s 0.17 times and Telkomsel’s 0.48 times). Earnings delivery is on a fast track because of cost optimisation on top of an expanding earnings before interest, tax, depreciation and amortisation (Ebitda) margin of almost 10 percentage points over the last five quarters.
Dialog is set to ride on strong further cost optimisation benefit, trickling in from savings in network costs. The group may also benefit from a potential divestment of Dialog’s pay TV operation. In 1H2010, Dialog TV narrowed net losses to LKR182 million (against LKR529 million loss in FY2009).
We mentioned in our earlier reports than Axiata would be announcing its dividend policy. While we are not expecting a competitive payout as high as other local telco companies (more than 75% payout policy), but establishing a dividend policy would offer another investment angle.
Free cash flow generation turned positive last year. Carving out capex requirement for FY2011 and FY2012 in the region of RM3.5 billion to RM3.7 billion per year, we believe Axiata has the ability to pay up to a 60% payout.
But we expect the range to be 30% to 50%, translating to 23 sen for FY2011. This would be more than the 25 sen per share Celcom will pay Axiata in FY2010.
Despite share price outperformance, we believe the valuation is attractive at the prevailing price, which implies a trailing EV/Ebitda of only 6.3 times (against SingTel’s 10.5 times and other regional (developing) peers’ 6.2 times). This is attractive — Axiata’s exposure in high-growth, under-penetrated countries, with further upside in earnings growth. — AmResearch, Aug 10
This article appeared in The Edge Financial Daily, August 12, 2010.
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