RHB Investment Bank has upgraded Axiata Group Bhd to a buy call but with a lower target price of RM4.30 from the previous RM4.50, citing the selldown of the stock that’s seen to be overdone at this juncture.
“At current levels, investors are getting its overseas business at a third of the overall valuation after stripping off Celcom Axiata Bhd’s and edotco Group Sdn Bhd’s implied value. Near-term macro concerns aside, we see significant scope for outperformance on a 6-12 month investment horizon,” said RHB analyst Jeffrey Tan.
He opined that the operational excellence instilled across Axiata’s operating companies is also expected to drive the continued outperformance of the group’s earnings before interest, taxes, depreciation and amortisation (EBITDA) despite heightened macroeconomic risks.
Tan noted that the group’s cost optimisation programme acts as a silver lining in the current environment, thus providing a good buffer to earnings. This saw group-wide cost savings of RM1.3 bil in its 2019 financial year with a total of more than RM4 bil in cost savings achieved since FY17 with a cumulative target of RM5 bil in savings targeted for FY21.
On the other hand, he believed that Celcom is more susceptible to the economic fallout of the Covid-19 pandemic and extended Movement Control Order (MCO) period, due to the larger mix of mid-urban, rural and low-yielding customers.
“While the telco’s new postpaid plan Celcom MEGA, which was launched in mid-February, offers a unique proposition with renewed monetisation opportunities, there may be challenges up-selling to its existing base given tight competition and feeble consumer sentiment,” said Tan, adding that there is also a likelihood of the market imputing a discount on Celcom’s prospects given its patchy track record.
“Overall, we see downside risk to the management’s guidance of low single-digit revenue growth for FY2020, excluding device sales, which also hinges on stronger enterprise sales. We lower Axiata’s FY20F to FY21F core earnings by 6.2% and 13.3% respectively, mainly to factor in a more cautious view on Celcom,” he added.
At the same time, Tan believed that Axiata’s US dollar debt exposure is manageable in the event of an extended weakness in the ringgit, with the support of a strong balance sheet.
While 42% of Axiata’s borrowings as at the fourth quarter of 2019 was in US dollars, about 47% is hedged with 22% of overall debt unhedged. Of the US$1.3 bil debt (about RM5.8 bil) sitting at the holding company level, US$800 mil, in the form of a US$300 mil bond and a US$500 mil sukuk, is maturing in the 2020 financial year.
“We understand that both tranches are being refinanced with funding headroom given the lower capex anticipated from supply chain disruptions and existing credit facilities,” said Tan.
According to him, merger and acquisition vibes remain strong as of the 4Q19 results call, with management not ruling out strategic investors or partners for either its digital or infrastructure business. However, no plans were indicated that Axiata would exit any markets.
As of the noon close, Axiata’s shares were done at RM3.20, down 8 sen with 4.4 million shares changing hands. – April 1, 2020
