axiata group berhad - wordpress.com group berhad analysis date: (axiata) ... of celcom in malaysia,...

AXIATA GROUP BERHAD Analysis Date:

(AXIATA) Prepared by: L. C. Chong

All figures in thousands of Ringgit Malaysia except per share values and ratios

Financial Year: 2012 31/12/2012 Latest Quarter: 31/12/2012

Price: Stock Category: Large Capital Growing

Overview

Board: Main Board FBMKLCI: YES

Industry: TRADING SERVICES

Sub‐Sector: TELECOMS INFRA AND NETWORK SERVICES

Ownership: Corporate Owned (Local)

Investment Strategy

Portfolio Strategy: Lump Sum + Top Up Averaging Down Method:

Portfolio Execution:

Basis for Buying:

Basis for Selling:

‐ Company owner/directors, and major fund institutions heavily buying

‐ EPS QoQ Growth > 15%

‐ Price is below or around the fair price derived from EY% High

‐ Stock price breaks out of consolidation/dip on an uptrend.

‐ Company owner/directors, and major fund institutions heavily selling

‐ Fundamental of business turns unattractive or bad

‐ Long term trend changed from bullish to bearish

‐ Price is above or around the price derived from EY% Low

‐ Quarterly EPS drop for 3 consecutive months.

‐ The current price is 30% away from my average holding price.

31/08/2013

6.74

Axiata Group Berhad, an investment holding company, provides telecommunication and consultancy services. The

company provides mobile telecommunication, passive infrastructure leasing, interconnect, leased, pay television

transmission, and other data services; and telecommunication network capacity, infrastructure, and services. It also offers

international gateway, electronic and mobile commerce, and telecommunication infrastructure; cable television and

multimedia services; information technology, including software development; network services, application services, and

content; and over‐the‐top and other on demand content delivered through multiple Internet connected devices. In

addition, the company provides fiber optic transmission network and electronic wallet services; fixed communications

services; constructs high rise office complex with telecommunication tower; offers financing; operates television

broadcasting network, including cable and pay television transmission; and provides international voice, international

private leased circuit, and managed services. Further, it is involved in dealing of marketable securities; trading and

distribution of communication devices and its related products; setting up and managing of concept retail stores; property

investment; and pre‐school education, kindergartens, child nurseries, child development centers, and other related

activities. The company has approximately 215 million mobile subscribers in Asia. It operates primarily under the brands

of Celcom in Malaysia, XL in Indonesia, Dialog in Sri Lanka, Robi in Bangladesh, Smart in Cambodia, Idea in India, and M1 in

Singapore. The company was formerly known as TM International Berhad and changed its name to Axiata Group Berhad in

March 2009. Axiata Group Berhad was incorporated in 1992 and is headquartered in Kuala Lumpur, Malaysia.

‐ Dollar Cost/Value Averaging

‐ Buy and Monitor

‐ Momentum

L. C. Chong of 15 http://lcchong.wordpress.com

Financial PerformanceRating: Very Good

Measure 3‐Y Avg. 5‐Y Avg. 3‐Y % 5‐Y % Consistency

ROE ≥ 15% 11.82% 11.15% 13.98% 23.62% 88%

ROIC ≥ 15% 12.67% 12.01% 4.48% 17.73% 85%

Rating: Excellent

Result YoY % 3‐Y % 5‐Y % 10‐Y % Consistency

Revenue 7.32% 6.11% 11.11% — 97%

EPS 5.71% 17.16% 18.14% — 89%

Although ROE and ROIC are below my benchmark, both ratios are trending up.

Both revenue and EPS are trending up too. The growth is also quite consistent.

2008 2009 2010 2011 2012

ROE 4% 9% 9% 12% 13%

ROIC 6% 10% 12% 13% 13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Sustainable Profitability

0.1348

0.220.21

0.280.296

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

2008 2009 2010 2011 2012

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Earnings ‐ Growth Quality

PAR‐Adjusted EPS Revenue Linear (PAR‐Adjusted EPS) Linear (Revenue)


Rating: Average


CROIC ≥ 15% 8.57% 7.17% ‐0.28% 0.41% 45%

CCC — — — — —

Rating: Average

Result YoY 3‐Y 5‐Y 10‐Y Consistency

Ops. Cash 19.91% 7.90% 23.69% — 86%

Owner

Earnings

‐14.68% ‐24.24% 254.10% — 30%

Although CROIC is below my benchmark, in overall, CROIC is growing up. The

reason of low CROIC is very high capex.

Consistent growth of revenue, but growth of owner earnings is inconsistent. Reason

is very high capex in expanding business.

2008 2009 2010 2011 2012

CROIC ‐12% 6% 13% 7% 8%

CCC 0 0 0 0 0

0

0

0

0

0

1

1

1

1

1

1

‐15%

‐10%

‐5%

0%

5%

10%

15%

Healthy Cash Flow

‐4,000,000

‐2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

2008 2009 2010 2011 2012

Cash Flow ‐ Growth Quality

Net Ops. Cash Owner Earnings

Linear (Net Ops. Cash ) Linear ( Owner Earnings)


Rating: Very Good


NPM ≥ 10% 13.70% 13.10% 11.41% 24.77% 68%

FCF/Sales ≥

5%

11.85% 9.75% ‐0.41% 0.70% 42%

Rating: Poor


DCR ≥ 150% 16.89% 14.45% ‐0.64% 0.67% 40%

Debt/Eqty. <

100%

92.77% 99.84% 3.93% ‐17.22% 50%

Quick R. ≥

100%

125.98% 113.75% ‐2.42% 33.28% 72%

‐AXIATA has no sufficient FCF and assets to repay its debt.

‐AXIATA is over highly leveraged, and AXIATA has to restrict its capex to RM4.5b as

guidance.

‐NPM and FCF/Sales are above my benchmark.

‐Especially for FCF/Sales ra o, even if capex of AXIATA is very high, it s ll able to

generate impressive amount of FCF from sales.

2008 2009 2010 2011 2012

NPM 4% 13% 11% 14% 14%

FCF/Sales ‐26% 11% 19% 10% 10%

‐30%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

Sustainable Competitive Advantage

2008 2009 2010 2011 2012

DCR ‐18% 11% 28% 14% 15%

Debt/Equity 219.32% 96.73% 87.89% 92.00% 95.08%

Quick R. 35% 55% 137% 111% 131%

‐50%

0%

50%

100%

150%

200%

250%

Conservative Debt


Economic Moats

Reference: http://lcchong.files.wordpress.com/2013/07/cp‐v30‐n2‐9.pdf

Not available or no moat found




Cost Advantage

Switching Costs

Network Effect

Intangible Assets

Efficient Scale



Market Timing

Discounted Cash Flows Valuation

Good 4% Base 0% Bad ‐4% Ugly ‐8% Good 4% Base 0% Bad ‐4% Ugly ‐8% Good 4% Base 0% Bad ‐4% Ugly ‐8%

Fair Value 1.84 1.73 1.64 1.55 1.83 1.69 1.57 1.47 1.80 1.63 1.48 1.37

Buy Under 1.47 1.39 1.31 1.24 1.47 1.36 1.26 1.18 1.45 1.31 1.19 1.10

Actual M.O.S. ‐266.92% ‐289.02% ‐312.03% ‐335.88% ‐268.48% ‐297.89% ‐328.09% ‐358.79% ‐273.44% ‐313.82% ‐353.94% ‐392.97%Refer Appendix 1

Growth rate applied in Reverse DCF to reach the current stock price (6.74): 33% Refer Appendix 2

EY% Valuation EPS QoQ Growth

EY% High EY% Low Buffer R4Q‐EPS FY13‐EPS* FY14‐EPS* Jun‐12 Sep‐12 Dec‐12 Mar‐13 Jun‐13 QoQ %

7.37% 4.31% 10% 0.30 0.32 0.36 0.080 0.080 0.070 0.072 0.076 ‐5.00%

6.91 7.48 8.26

4.21 4.56 5.04

6.45 6.98 7.71

Refer Appendix 3

Insider Trading Comments

Refer Appendix 4

(blank)

# Securities Price

(blank) 0 0.00

Grand Total 0 0.00

‐I won’t use DCF valua on because of inconsistent owner earnings.

‐Based on EY% valua on, AXIATA is s ll undervalued.

‐I will use technical analysis to accumulate more shares.

3‐Y 5‐Y 10‐Y

Buy Under

Sell Above

Fair Value


Notes

Created Date Details Type Source Type

30/08/2013 Axiata 2013 capex guidance at RM4.5b

http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=252591&Itemid=79

Announcement Newspaper

27/08/2013 Axiata Group Bhd ‐ Unlocking Value In Its Telco Towers

We continue to view the news positively given that the move to consolidate and list the tower infrastructure assets could

poten ally unlock its value as well as create synergies from the various joint mone sa on opportuni es.

However, given the different regulatory settings across multiple jurisdictions, we believe Axiata could face great challenges

in the execu on process.

http://klse.i3investor.com/blogs/kenangaresearch/35562.jsp

Analysis Analyst Report

16/08/2013 Axiata Group ‐ Cash Call Updates

Spotlight on Indonesia and India. A review of Axis’ financials raises doubts about its ability as a going concern. We expect

XL to pay way below USD1b, hence negating the need for a cash call. Meanwhile, we believe Axiata would easily afford its

share of equity‐raising from Idea (c.MYR400m). Overall, the sector lacks re‐rating catalysts given rising bond yields.

Maintain HOLD and MYR6.55 target price.

Axis to cost way below USD1b? A USD1‐1.5b price tag for Axis (as quoted in the press) appears too high, in our view. Saudi

Telecom disclosed details of Axis’ financials for the first time in its 1H13 results. Axis’ net debt stood at USD604m as at Jun

2013, alongside a negative equity base of USD142m. In addition, Axis lost USD192m after tax in 1H13 (we estimate an

EBITDA loss of c.USD70m).

A cash call by XL is unlikely. We forecast XL’s gearing at 96% by Dec 2013. Even at an acquisition EV of USD1b, we estimate

XL’s gearing at only 164%. A cash call by XL is not necessary, in our view. The Ministry has suggested a partial return of

some of Axis’ spectrum in the event of an XL‐Axis merger. Since XL is almost purely after spectrum, we expect the eventual

acquisi on price to be lowered further.

http://klse.i3investor.com/blogs/kltrader/34873.jsp

Risk Analyst Report



14/08/2013 ‐ It was reported in local dailies today that the Indonesian Government has indicated that it will give formal approval to

Axiata to own a stake in PT Axis Telekom Indonesia (Axis) later this year. In late July 2013, it was reported that XL has

already received the Communica ons and Informa on Ministry’s ini al approval for the acquisi on of Axis.

‐ A potential acquisition may bring a few key positives: (1) Elimination of competition might allow price stabilisation and

improve competitive dynamics; (2) Cost reduction given consolidation of infra – Axis has 10K 2G and 3G sites (vs. XL’s

39,819 sites); (3) Potential 35% expansion in subs to 66mil, potentially positioning the merged group as the 2nd largest

player in Indonesia – currently, the two largest players are Telkomsel (125mil subs) and Indosat (55mil subs); (4)

Acquisition of additional spectrum, which could reduce capex by 40%‐50% ‐ Axis currently owns a 10MHz block in the 2.1

Ghz (3G) spectrum, while XL has 15MHz.

‐ During XL’s results teleconference, management was still tight lipped on pricing of a potential acquisition, but indicated

that both parties have been looking at it seriously for quite some time and are in the midst of working out “solutions” in

valuation vs. components in Axis that comes with a potential acquisition. One major regulatory hurdle is that XL may not

get to acquire all of Axis’ 10MHz block. It is said that for the acquisition (including spectrum) to go through, XL itself needs

to return a 5MHz block in the 2.1GHz spectrum (recently won though a beauty contest along with Telkomsel).

http://klse.i3investor.com/blogs/amresearch/34793.jsp

Announcement;Growth Driver Analyst Report

06/08/2013 Poten al irra onal compe on, regulatory risks, unable to mone ze data, dumb pipes.

http://klse.i3investor.com/blogs/hleresearch/34393.jsp

Risk Analyst Report

02/08/2013 AXIATA GROUP ‐ Signs Of A Trough In XL’s 2Q13 Results

ARPU was marginally lower than its exis ng subscribers. 2Q13 EBITDA margin improved 0.3% q‐o‐q to 40.6%.

Acquisition of Axis? During teleconference, XL management was silent on the acquisition of Axis except mentioning that XL

has received “in principle” approval from regulators and XL is in negotiation with Saudi Telecom over the acquisition of

Axis. We believe Axis will be a good fit for XL with its spectrum availability but pricing will be the key.

Management guidance. Management amended its revenue growth guidance to mid‐single digit (from in line or better than

market), indicating that y‐o‐y revenue growth in 2H13 will be stronger than 1H13 in light of the low base in 2H12. In

addi on, it kept EBITDA margin at low 40s and cash‐out capex at low end of IDR8.0‐9.0trn.

http://klse.i3investor.com/blogs/PublicInvest/34240.jsp

Outlook Analyst Report



02/08/2013 Axiata Group ‐ Inflec on point reached

Management lowered its revenue growth guidance (to “mid‐single digit” from “in‐line with industry”), but maintained

margin guidance. The tone now is that XL is less aggressive in tweaking up absolute price points (having done that in

February 2013). ARPU is still expected to increase but primarily by taking out more freebies from the current offerings and

stimulating usage. Margins guidance is maintained despite the lower revenue growth guidance given lower capex

expecta ons.

Regarding a potential acquisition of Axis, both parties (XL and Saudi Telco) have been looking at it seriously for quite some

time and are in the midst of working out solutions in valuation vs. components in Axis that comes with a potential deal.

Management indicated that with an additional 10‐15MHz spectrum, it can lower capex by a substantial 40%‐50%.

Approval received from the ministry is specifically for potential acquisition of Axis, but management does not rule out

other poten al transac ons taking place.

http://klse.i3investor.com/blogs/amresearch/34296.jsp

Outlook Analyst Report



10/07/2013 OFFICIAL ROLLOUT OF 4G LTE

The Celco officially rolled out its 4G LTE network in the 3rd week of Apr 2013 and started trial runs with customers and will

soon introduce promotions with plans and bundles. For now the network is only available via USB dongle for RM199 with

three months free access, which can be purchased at Blue Cube stores in Sunway Pyramid, KL Pavilion and Menara Celcom.

SURESH said that CELCOM AXIATA had no specific aims in terms of market share target. ” …. We are expecting to get a fair

share from the market. Our focus for this year is to provide good experience ….” he added.

SURESH sees plenty of opportunities in 4G LTE such as digital content including gaming, music, social network applications,

mobile commerce, mobile remittance and mobile health which would play key roles as drivers for the 4G LTE adoption as

well as new revenue generators for the Group.

RM300M CAPEX OVER NEXT 3 YEARS

CELCOM would invest RM300m over three years for further deployment of 4G LTE, with RM150m worth of investment

allocated for 2013.

300 SITES RUNNING BY END 2013/1500 SITES BY END 2015

By 3Q‐CY2013, CELCOM expects to have 300 sites running and by end‐2015, 1,500 sites will be switched na onwide.

PRICING & COMPETITION

On the pricing competition that might come from other operators, especially from mobile virtual network operators, he

said: ” …. We are happy to compete with them. Their focus may be on providing access, while our focus is to provide more

value‐added services that customers can experience from the 4G LTE …. We will keep delivering new and exciting products

and services you will see in six to 12 months there will be more new products and services for both consumers and

businesses ….” he added.

DIGITAL SERVICES TO BE OFFERED

CELCOM said in a statement that it would unveil a slew of digital services covering various dimensions that would allow its

customers to step up from just voice and data connectivity to solutions that genuinely cater to its customer diverse

lifestyles and a holis c device ecosystem.

IN PARTNERSHIP WITH DIGI FOR FIBRE INFRA

SURESH said that the Company had a partnership with DIGI.COM for joint fibre infrastructure. As for spectrum partnership,

SURESH said that the Company was looking for at least one partner.

CELCOM h k d ith it t k i f t t t i 2011 t t LTE d bil t k i l

Growth Driver;Outlook Newspaper



23/05/2013 h p://www.theedgemalaysia.com/index.php?Itemid=79&id=239730&op on=com_content&task=view

Axiata Bhd recorded a net profit of RM614.6 million for its first quarter ended March 31, which was 8.7% higher than the

RM565.6 million it posted in the previous corresponding quarter.

Revenue was also higher at RM4.5 billion, compared with RM4.2 billion it recorded in 1Q12.

In a statement to Bursa Malaysia, Axiata said the group saw a solid performance, in a seasonally slow quarter, amidst

heightened compe ve pressures and strengthening ringgit.

Axiata Chairman, Tan Sri Datuk Azman Mokhtar said: “It has been a tough start to the year but the group delivered

resilient results. We will continue to maintain execution focus on fundamentals and our long term objectives of ensuring

strong profit and cash, whilst looking at more revenue growth opportunities.”

Announcement Newspaper

08/05/2013 Since AXIATA is only 6 years old and needs FCF to grow, at this juncture, I will look into Absolute PE and EY% Oscillator. In

the past 6 years, AXIATA FCF is not really growing. However, looking at its prospect, I will add more positions if got

opportunity.

Note ‐


Appendix 1 ‐ Discounted Cash Flows Valuation

Discount Rate Margin of Safety

Average risk

premium

Average Risk

free rate

Unadjusted

Discount %

Business Risk

Factor

Financial Risk

Factor

Discount % Initial RRR Dividend Yield Est. EPS

Growth

Unadjusted

MOS

Risk‐Based

MOS

1.00 1.06 12.23% 35% 17% 20%

10%

Growth Estimation Financial Figures

7 61 75 21 57Owner

Earnings GR.

Terminal % Decay Rate

(Yr4E‐Yr7E)

Extra Decay

(Yr8E‐Yr10E)4% Shares Out. FCF Type 2012 Owner

Earnings

Excess Cash Intangibles

Assets

Intangibles%

add to DCF

8% 3% 15% 20% ‐4% 8574.86 761.82 2,824.89 0%

0% ‐8% 50.00%

Projection of Future Free Cash Flow and Fair Value

Senario 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

FV 761.82 761.82 761.82 761.82 761.82 761.82 761.82 761.82 761.82 761.82

DPV 7,573.78 6,748.37 6,012.91 5,357.61 4,773.72 4,253.47 3,789.91 3,376.87 3,008.85 2,680.94

PV 15,273.73 15,053.14 14,856.58 14,681.45 14,525.40 14,386.36 14,262.47 14,152.09 14,053.73 13,966.10

Fair Value 3‐Y: 1.73 5‐Y: 1.69 10‐Y: 1.63

8392.51Owner

Earnings

7.60% 3.99% 11.59% 19%3%

Base

0%

FV 792.29 823.99 856.94 870.83 900.44 931.06 962.71 944.26 969.95 996.33

DPV 7,876.74 7,299.04 6,763.71 6,124.25 5,642.34 5,198.36 4,789.31 4,185.57 3,830.86 3,506.20

PV 15,603.83 15,680.31 15,751.17 15,660.60 15,684.38 15,706.29 15,726.48 15,497.88 15,486.50 15,476.08

Fair Value 3‐Y: 1.84 5‐Y: 1.83 10‐Y: 1.80Good

4%

FV 731.35 702.09 674.01 663.38 640.82 619.04 597.99 611.00 594.38 578.21

DPV 7,270.83 6,219.30 5,319.84 4,665.30 4,015.53 3,456.25 2,974.88 2,708.34 2,347.54 2,034.80

PV 14,943.63 14,449.49 14,026.82 13,790.40 13,500.52 13,251.01 13,036.26 13,012.45 12,862.05 12,731.68

Fair Value 3‐Y: 1.64 5‐Y: 1.57 10‐Y: 1.48Bad

‐4%

FV 700.88 644.81 593.22 574.80 535.71 499.28 465.33 486.98 460.49 435.44

DPV 6,967.88 5,711.82 4,682.18 4,042.36 3,356.89 2,787.65 2,314.94 2,158.61 1,818.73 1,532.36

PV 14,613.52 13,869.38 13,259.38 12,981.85 12,597.24 12,277.84 12,012.61 12,049.74 11,872.86 11,723.83

Fair Value 3‐Y: 1.55 5‐Y: 1.47 10‐Y: 1.37Ugly

‐8%


Appendix 2 ‐ Reverse Discounted Cash Flows

Discount Rate Margin of Safety

Average risk

premium

Average Risk

free rate

Unadjusted

Discount %

Business Risk

Factor

Financial Risk

Factor

Discount % Initial RRR Dividend Yield Est. EPS

Growth

Unadjusted

MOS

Risk‐Based

MOS

7.60% 3.44% 11.04% 1.00 1.06 12.23% 35% 3% 10% 19% 20%

Growth Estimation Financial Figures

7 61 75 21 57Owner

Earnings GR.

Terminal % Decay Rate

(Yr4E‐Yr7E)

Extra Decay

(Yr8E‐Yr10E)

Shares Out. FCF Type 2012 Owner

Earnings

Excess Cash Intangibles

Assets

Intangibles%

add to DCF

8% 761.82

33%

Projection of Future Free Cash Flow (GR. 33%)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

FV 1,013.22 1,347.58 1,792.29 2,048.19 2,622.71 3,358.38 4,300.41 3,848.04 4,711.54 5,768.81

DPV 10,073.13 11,937.19 14,146.20 14,404.20 16,434.44 18,750.83 21,393.70 17,056.95 18,608.47 20,301.12

PV 17,997.08 20,931.00 24,407.86 25,956.83 29,459.98 33,456.90 38,017.18 35,209.14 38,428.44 41,940.56

Fair Value 3‐Y: 2.85 5‐Y: 3.44 10‐Y: 4.89

3% 15% 20% 8574.86 50%8392.51Owner

Earnings

2824.89


Appenfix 3 ‐ EY% Valuation

EY% High EY% Low Buffer R4Q‐EPS FY13‐EPS* FY14‐EPS*

7.37% 4.31% 10% 0.30 0.32 0.36

6.91 7.48 8.26

4.21 4.56 5.04

6.45 6.98 7.71

* Estimations from Reuters or local analysts' reports

High Low

R4Q FY13 FY14

Green Zone Price($) 4.04 4.37 4.83

7.06% Buy Under 4.21 4.56 5.04 10%

3.06%

4.62% Sell Above 6.45 6.98 7.71 10%

Red Zone Price($) 6.91 7.48 8.26

Low High

Red Zone EY% 4.31%

Buy Under

Sell Above

EY% Price

Fair Value

Green Zone EY% 7.37%

Trading Range


Appendix 4 ‐ Insider Trading

Last 3 months or last 30 insider transactions

Transaction Date Securities Holder Type of transaction No of securities Price Transacted


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