Emerging Market Risks And 194% Revenue Decline Will Compress Margins

Key Takeaways

• Increased competition from internet-based services and market saturation are pressuring traditional revenue streams and limiting growth opportunities.
  
• Regulatory challenges, currency volatility, and heavy network investment needs are driving margin compression and causing uncertainty over future profitability.
  
• Successful mergers, frontier market recovery, infrastructure monetization, operational efficiencies, and disciplined financial management are driving enhanced profitability, reduced debt, and outlook for improved shareholder returns.

Catalysts

An investment holding company, provides telecommunications services.

• Accelerating shifts toward internet-based communications, such as OTT messaging and calling platforms, are increasingly eroding the relevance of traditional mobile voice and SMS services, undermining one of Axiata's enduring sources of revenue and creating a persistent drag on overall top line growth.
  
• Growing regulatory intervention, particularly in emerging Asian markets where Axiata operates, is raising operational complexity and ongoing compliance costs, which threatens to compress margins and may limit the company's flexibility in capex allocation, thereby eroding long-term profitability.
  
• Chronic currency volatility across Axiata's portfolio-spanning Bangladesh, Sri Lanka, and other emerging markets-continues to translate into weaker consolidated revenues and earnings when repatriated to the Malaysian ringgit, likely resulting in inconsistent and potentially declining reported earnings despite local operational improvements.
  
• The massive capital expenditure requirements for 5G network deployment and anticipated future 6G investments risk outpacing any incremental revenue growth, especially as price competition and regulatory controls keep ARPU from rising meaningfully, which could lead to prolonged margin compression and further strain on free cash flow.
  
• Market saturation in core Southeast Asian markets is slowing subscriber growth, putting pressure on Axiata to extract more value from an already-mature user base; however, persistently low ARPU in these regions and the intensifying commoditization of mobile services threaten both revenue expansion and net profit margins over the medium to long term.

Axiata Group Berhad Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Axiata Group Berhad compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Axiata Group Berhad's revenue will decrease by 19.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.6% today to 4.8% in 3 years time.
• The bearish analysts expect earnings to reach MYR 540.0 million (and earnings per share of MYR 0.06) by about September 2028, down from MYR 999.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, up from 24.1x today. This future PE is greater than the current PE for the MY Wireless Telecom industry at 21.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Axiata Group Berhad Future Earnings Per Share Growth

Risks

• Ongoing industry consolidation and successful mergers, such as the XLSMART and Dialog-Airtel combinations, are already resulting in substantial operational synergies and ARPU growth, which supports higher revenue and improved net margins for Axiata over the long term.
  
• Frontier markets like Bangladesh and Sri Lanka are exhibiting strong signs of market repair, with solid improvements in ARPU and profitability, macroeconomic recovery, and effective local cost management, which are positively impacting revenue and earnings.
  
• Axiata's active monetization strategy, including potential infrastructure asset sales and value unlocking from business units like EDOTCO and Link Net, is expected to reduce debt and increase financial flexibility, which would support net profit growth and overall balance sheet strength.
  
• Robust execution of operational efficiency initiatives and network modernization, such as capturing merger synergies ahead of schedule and aggressive CapEx strategies, are steadily lowering operating costs and boosting EBITDA margins.
  
• The group's firm dividend payout, healthy cash flows from operating companies, and substantial debt reduction reflect strengthening financials, which increase the likelihood of sustained or growing future earnings and shareholder returns.

Valuation

• The assumed bearish price target for Axiata Group Berhad is MYR1.57, which represents two standard deviations below the consensus price target of MYR2.81. This valuation is based on what can be assumed as the expectations of Axiata Group Berhad's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR4.5, and the most bearish reporting a price target of just MYR1.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MYR11.3 billion, earnings will come to MYR540.0 million, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of MYR2.62, the bearish analyst price target of MYR1.57 is 66.6% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.