Kenanga Research has maintained an outperform recommendation with Axiata Group Bhd with a trading price of RM4.30 as its sector-top pick for its regional exposure, as investors may shun domestic-only telcos amid the continued uncertainty regarding the single wholesale network.
Moreover, we believe Axiata also provides exposure to two unique and promising digital businesses that have the potential to scale regionally and compete globally.
It said that having a large, fixed cost base (staff @~70% of OPEX), and minimal variable costs, ADA’s profitability will improve as it scales on better economies of scale.
It said that over the next 3~5 years, it expects its EBITDA margins to expand from the current 10% to mid-teens percentage.
It said that while ADA’s PAT is currently not separately disclosed, it estimate that c.70% of its EBITDA flows down to PAT, as it has low D&A and interest expenses.
Its risks to call include weaker-than-expected performance at Celcom and regional OpCos, poorer-than-expected costs management, the proposed Celcom-Digi merger failing to obtain the necessary approvals, and stronger-than-expected competition.
