Axiata lacks strong re-rating catalysts, says Alliance IB Research

by **Cals** Wed 09 Oct 2013, 12:05

Business & Markets 2013

Written by Cynthia Blemin of theedgemalaysia.com

Wednesday, 09 October 2013 11:48

KUALA LUMPUR (Oct 9): Alliance Research has maintained its neutral call on Axiata Group Bhd at RM6.92 with a target price (TP) of RM6.70, and said Axiata lacked strong re-rating catalysts in the near term.
The research house in a note Wednesday, said this despite feeling positive about the long-term prospect of the company after an analyst and investor day visit with the management yesterday.
“Given the lack of strong re-rating catalysts in the near term, our recommendation on Axiata remains a neutral with a TP of RM6.70,” it added.
Still healthy balance sheet and decent net dividend yield of 3.6% should cap the downside risk for Axiata, it noted.
The research house said discussions during the half-day event focused mainly on various initiatives by management to improve its cost structure, important in order to remain competitive going forward.
It added that the management also shed some details about carving out its tower assets, but have yet to guide on the timeline for the eventual IPO of TowerCo.
Horizontally, Axiata is achieving cost improvement through the collaboration with other industry players for infrastructure sharing such as the DiGi-Celcom partnership in Malaysia, it said.
It also outsources programmes via the partnership with Huawei for network management services In Indonesia, it added.
Alliance Research notes that vertically, the company is also examining its own internal process and formulating ways to achieve better operational efficiency.
So far, Axiata has formed specialised tower companies under each of its OpCos, except for XL and Dialog, it said.
Being independently managed, Axiata estimates that an annual opex reduction of more than 5% can be achieved, while capex can be reduced by approximately 20-30%, it added.
The research house noted that TowerCo can also independently engage other mobile operators to improve its tenancy rate, which is estimated to increase to 1.6x by 2016,from 1.4x currently.
Along with the increase in tenancy rate, EBITDA margin for the TowerCo is also expected to rise from 35% to 41%, translating into better profitability, it added.
However, Alliance Research opined that there is no guidance yet on the structure and timeline for its widely-expected tower asset IPO.
Nevertheless, management expects that the eventual listing will enhance shareholder value as independent tower companies typically attract EV/EBITDA multiples of 14x-16x, higher than Axiata current multiple of 8.5x, it added.