Rapid Digitalization And Urbanization Will Unlock Secular Opportunities

Key Takeaways

• Outpaced analyst expectations due to rapid synergy realization, digital transformation, and strong growth in subscriber base and digital revenues.
  
• Expansion in digital infrastructure and fintech positions Axiata for sustainable, higher-margin earnings as regional adoption accelerates.
  
• Digital disruption, macroeconomic volatility, high debt, complex mergers, and rising capital expenditure threaten revenue growth, margins, and earnings sustainability amid market saturation.

Catalysts

An investment holding company, provides telecommunications services.

• Analyst consensus expects merger synergies in Indonesia and Sri Lanka to incrementally boost earnings, but the ongoing integration is already driving outsized ARPU and profit growth well ahead of expectations, suggesting full synergy realization by 2027 could lead to EBITDA and margin expansion materially beyond current forecasts.
  
• While analysts broadly expect cost discipline and operational excellence to drive modest margin improvements, the most recent quarters show accelerating sequential EBIT and EBITDA growth, indicating Axiata's focus on aggressive modernization, network rationalization, and real-time digital transformation could create a step-change in sustainable profitability faster than the market anticipates.
  
• Frontier market operations in Bangladesh, Sri Lanka, and Cambodia are experiencing stronger-than-expected organic subscriber and ARPU growth as digital penetration and usage soar, positioning Axiata for explosive revenue and net income growth as regional digitalization and mobile internet adoption accelerate.
  
• The rapid buildout and monetization of digital infrastructure assets, including Link Net's transition to a high-growth wholesale fiber model and Edotco's expanding tower base, enables substantial recurring high-margin revenue streams that are not yet adequately reflected in consensus valuations, unlocking new structural earnings uplift.
  
• Boost Bank's progress and Axiata's ecosystem expansion into advanced digital payments and mobile financial services gives the group a foothold at the center of Southeast Asia's fintech and e-commerce boom, offering significant upside to long-run group revenue and diversified, higher-margin earnings.

Axiata Group Berhad Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Axiata Group Berhad compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Axiata Group Berhad's revenue will grow by 3.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.6% today to 5.6% in 3 years time.
• The bullish analysts expect earnings to reach MYR 1.4 billion (and earnings per share of MYR 0.15) by about September 2028, up 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 bullish analyst cohort, the company would need to trade at a PE ratio of 34.6x 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

• Intensifying digital disruption and OTT competition is putting persistent pressure on traditional voice and SMS revenues, resulting in challenges to long-term ARPU growth and the company's ability to expand topline revenue.
  
• Heightened macroeconomic volatility, particularly currency depreciation and unstable economic conditions in emerging markets such as Bangladesh and Sri Lanka, could negatively influence consumer spending on telecom services and weaken revenue and earnings.
  
• High leverage and elevated debt levels, even after recent reductions, may constrain Axiata's free cash flow and increase refinancing risk, which could put further stress on net margins and future earnings if interest rates or macro conditions deteriorate.
  
• Ongoing integration and execution risks from complex mergers, such as CelcomDigi and XLSMART, pose the threat of unanticipated costs and operational inefficiencies, which may delay or dilute the realization of forecasted synergy benefits and thereby impact net profit.
  
• Rising capital expenditure requirements for 5G, potential future spectrum auctions, and regulatory compliance costs, combined with market saturation in core geographies, may erode free cash flow and limit earnings growth as incremental revenue opportunities become more difficult to capture.

Valuation

• The assumed bullish price target for Axiata Group Berhad is MYR4.04, which represents two standard deviations above 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be MYR24.3 billion, earnings will come to MYR1.4 billion, and it would be trading on a PE ratio of 34.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of MYR2.62, the bullish analyst price target of MYR4.04 is 35.1% higher.
  
• 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.