KUCHING: Axiata Group Bhd’s (Axiata) data segment is expected to remain its key revenue growth driver, according to analysts.
According to Cheow Ming Liang from the research arm of Kenanga Investment Bank Bhd’s (Kenanga Research), the group’s future revenue growth opportunities are very much dependent on its data services where Axiata continues to believe that data services will be its next growth area when the data universal eco system (such as devices, networks and applications) improves.
“Meanwhile, with low fixed-line penetration in most of its operating countries (OpCos) markets, Axiata is well positioned to provide high-quality data services, in particular, to small and mid-screen connections,” Cheow opined.
The group’s smartphone penetration rate is still in the growing stage where Celcom Axiata Bhd (Celcom) has only recorded 27.5 per cent in the second quarter of the current year 2013 (2QCY13); PT XL Axiata Tbk (XL) (16.4 per cent); Dialog Axiata PLC (Dialog) (16.3 per cent) and Robi Axiata Limited (Robi) (5.9 per cent) in contrast to the mature markets – Australia, Singapore, Korea and the US – of between 48 and 61 per cent.
Axiata viewed that its average revenue per user (ARPU) will tend to improve with increasing mobile penetration rate, thus providing rooms for earnings growth going forward.
Analysts Chin Jin Han, Wong Ming Tek, and Sachin Mittal of HwangDBS Vickers Research Sdn Bhd (HwangDBS Vickers Research) however, noted that while data continues to be the central theme of growth for Axiata (driven by increasing data traffic), there are also some key challenges involved.
“These key challenges include depressed data pricing as markets have not incorporated the quality of service-based packages.
“In addition, there is the potential cost challenge in offering data packages with free social media usage as they incorporate capacity-sucking features (for example, videos), while the margin-dilutive nature of data versus voice and SMS – which are falling behind in growth – will also need to be taken into consideration as capacity utilisation is still fairly low,” the analysts said.
They further opined that use of data analytics in subscriber usage patterns and micromarket analysis, which is now perpetuated to regional OpCos, will be primary weapons in Axiata’s arsenal to drive incremental ARPU and subscriber acquisition.
Cheow further highlighted that Axiata is currently in the midst of its phase 2/3 (2011 to 2015) transformation journey where the group is aiming to build a new-generation telecommunication company beyond voice and SMS.
The current transformation is focusing on protecting and sustaining its core businesses whilst venturing aggressively into new business areas such as data and digital services.
Meanwhile, the group aims to enter into the phase four transformation in 2016 to 2020 period to build a sustainable and profitable growth company.
Aside from the data segment, HwangDBS Vickers Research’s analysts pointed out that cost management and capital expenditure (capex) efficiency had also emerged as main focus areas for Axiata.
To note, a regional treasury management centre and centralisation of equipment procurement was established to improve bargaining power with suppliers and optimise risk management, according to analysts.
“A carve-out of Axiata Group’s towers (save XL’s) into a separate opco is also on the cards to better monetise assets, though a timeline was not given.
“Prudent site capacity expansion based on usage patterns and implementation of low cost networks remain ongoing initiatives,” the analysts added.
With that, the analysts projected that Axiata’s prospects are a long-term play, given XL’s disappointing earnings and near-term profit-dilutive Axis acquisition.
They added that further cost savings and efforts at adding incremental revenues are likely to only kick in towards 2015.
Although the group has outlined that a target minimum cash balance of RM2.5 billion as capital expenditure (capex) winds down in the medium-term, dividend policy is still expected to be progressive.
As such, HwangDBS Vickers Research maintained its ‘fully valued’ recommendation on the stock with a target price of RM5.75 per share.
For Kenanga Research, as there is no change to its financial year 2013-financial year 2014 (FY13 to FY14) earnings forecasts for now, it reiterated its ‘market perform’ rating on Axiata with an unchanged target price of RM6.70 per share, based on a targeted FY14 equity value/forward earnings before interest, taxes, depreciation and amortisation (EBITDA) of 8.5-fold.