Monetization Of Digital Assets Like Link Net Will Unlock Value For Future Investments

Key Takeaways

• Market consolidation in Indonesia and improved operational excellence are expected to boost revenues and enhance margin growth.
  
• Debt reduction strategy and digital asset monetization could improve financial health and benefit shareholder returns.
  
• Political instability and competition in key markets may hinder Axiata's revenue growth, strategic plans, and profitability across multiple regions.

Catalysts

An investment holding company, provides telecommunications services.

• Axiata is in the process of completing its market consolidation strategy in Indonesia, which could lead to increased market share and improved competitive positioning, likely boosting revenues.
  
• The integration and synergies from the Airtel and Dialog merger in Sri Lanka are expected to be realized in 2025, potentially driving cost savings and improving net margins.
  
• The company's focus on operational excellence and cost management has already resulted in improved EBIT margins and could continue to enhance margins and earnings in the future.
  
• Axiata's strategy to reduce debt, aiming for a net debt to EBITDA target of 2.5x by 2026, could improve financial health and reduce finance costs, positively impacting earnings.
  
• Monetization of digital assets, including potential recapitalization or sale of Link Net and other assets, could unlock value and provide additional capital for future investments, benefiting shareholder returns and earnings.

Axiata Group Berhad Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Axiata Group Berhad's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 11.1% in 3 years time.
• Analysts expect earnings to reach MYR 1.4 billion (and earnings per share of MYR 0.12) by about June 2029, up from MYR 282.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR2.2 billion in earnings, and the most bearish expecting MYR749.5 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.9x on those 2029 earnings, down from 61.8x today. This future PE is greater than the current PE for the MY Wireless Telecom industry at 18.0x.
• 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 8.39%, as per the Simply Wall St company report.

Risks

• The ongoing economic and political instability in Bangladesh, alongside events like network shutdowns and floods, poses a risk to revenue growth in that market.
  
• The competitive posturing in Indonesia, particularly from market leaders, may impact pricing strategies and affect the anticipated ARPU improvements, thereby influencing revenue and profitability.
  
• The uncertainty regarding the 5G wholesale network's final outcome in Malaysia could introduce risks that affect Axiata's strategic plans and future revenue streams.
  
• Continued high interest rates might limit the potential for monetizing digital infrastructure assets at favorable valuations, impacting future revenues and returns.
  
• The fragile economic and political conditions in frontier markets could lead to instability and challenges in revenue generation and financial performance.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of MYR2.67 for Axiata Group Berhad based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR4.1, and the most bearish reporting a price target of just MYR1.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be MYR12.8 billion, earnings will come to MYR1.4 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of MYR1.9, the analyst price target of MYR2.67 is 28.9% 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.