Axiata Group Berhad (AXIATA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Clare Chin, Head of Investor Relations at Axiata Group Berhad. Thank you for standing by, and welcome to Axiata's investor call on edotco's acquisition of Tower Portfolio from PLDT to be the largest independent TowerCo in the Philippines. Today, we have with us Dato' Izzaddin Idris, Axiata Group's CEO; and Vivek Sood on my left, Axiata Group's CFO. From edotco dialing in from Manila are Mohamed Adlan Ahmad Tajudin, edotco's CEO; Annis Sheikh Mohamed, edotco's CFO; as well as Anthony Kersauson, Director of M&A at edotco. There will be a short presentation followed by a Q&A session. Lastly 2 housekeeping reminders, you'll be on mute throughout the presentation. And also note that we will end the call comply at 11 a.m. Without further ado, let me hand over the call to Dato' Izzaddin for his welcoming remarks.

Thank you, Clare. Good morning, everybody. I'm heartened to see here something like 78 attendees, Clare. I didn't know you're dishing up figures this morning. But thank you for -- yes. Thank you all for joining this meeting. At a very short notice, we tried to organize this so that everyone has a good perspective of the transaction that was consummated yesterday where edotco is acquiring something like 3,000 towers from PLDT companies to be the largest leading independent tower company in the Philippines. As you may be aware, we started the foray into the Philippines some 2, 3 years ago, and we have a wholly-owned subsidiary now in that -- in the country, this will enable us to jump start that and scale up actually the basis and the opportunities in the Philippines. This transaction is valued at about $800 million, PHP 42 billion, around about MYR 3.4 billion. So this is a pretty -- it's like needle moving insofar as edotco is concerned because in a way, we are derisking from some of the larger markets and larger exposures we have. Number two, it is not Axiata MNO and therefore, there's less reliance on Axiata's revenue or Axiata's MNO revenue but there is also the opportunity in this business. It was a very keen bidding process. At the outset, there were something like 16 bidders for the 2 portfolios. So we were successful -- we are successful in portfolio #2. So more details of the transaction and the rationale as well as the opportunities and what we see in this acquisition, I'd like to invite Adlan, the CEO of edotco to do the presentation. Adlan?

Thank you, Dato'. Good morning, everyone. [Foreign Language] greeting from Philippines. So I think we are happy to announce that we've signed a deal with PLDT to acquire 2,973 towers with the commitment of an additional 750 build-to-suit. This is a transformational deal for edotco given that is strengthening our position as independent tower company at Pan Asia, but also more importantly, increasing our exposure in the emerging markets, right? I think you would also see in the later slides as well, that we are a strong counter-party, but with very solid MSA -- sale and leaseback MSA as well. I mean you probably can see these are some of the better terms that we have against some of the other MSAs that we have in our other footprint. So thirdly, Philippines has always been a strategic market for us, right? And you know that there's high growth potential opportunity. And more importantly, I think you see that they are probably today at an inflection point where independent tower companies are starting to make a presence, and that probably would drive infrastructure sharing, tower sharing a lot more and accelerating the tower sharing a lot more in the years to come, right? So -- and that gives us a lot of opportunity. We also believe that today, the colocation is at one, no sharing. But with the ITC market coming into space colocation will be accelerated, yes. So -- and Philippines as well, this will enable us to unlock significant value, right, to edotco, ahead of our future monetization opportunity. What's important is with this acquisition, we are operating with scale, and we are the leading tower company in Philippines. Can we go to the next slide? I will take you through a little bit in terms of the transaction overview. So that was mentioned, 2,973 towers at USD 800 million with a commitment of 750 build-to-suit by PLDT. However, there's a few points that I want to raise, right, in terms of the MSA terms, right? So if you look -- this is a 10 plus 5 plus 5 deal, right? So essentially, is close to 20 years deal. And I think what is more important is actually on the lease rate that we are collecting here, right? So it's about PHP 100,000 to PHP 120,000 and what the tower and power do, right? And in this case, electricity and fuel is pass-through. And if you were to compare this lease rates with other markets rate, this is on average around USD 2,200 per month. If you were to compare, for example, in the previous deal -- last deal in Indonesia and all the Indonesia lease rates are probably around $700, $800 per month. And you see the gap that -- the real gap that we are getting -- the lease rate that we are getting from here as compared to probably the last deal that you see in Indonesia. In addition, there's also a 3% escalator on the O&M part, right, which out of the 100 is around 30,000, right? So -- and this definitely comparing across is probably one of the factors MSA terms that we are probably getting, right? From a deal perspective, this is expected to close 1,500 in batches, 1,500 by Q2 2022, and the balance in small batches towards the end -- by the end of 2022, right? So both these transactions, we would have actually 54,000 towers that we own and manage across 9 countries across Asia. If we can go to the next slide. So this gives a little bit about the portfolio of assets that we are acquiring. If you look at the math here, I mean, essentially the areas that we are acquiring is actually from Metro Manila downwards to South Luzon, Visayas, Mindanao and Palawan, right? So -- and this essentially is complementing our existing footprint that we have in the Metro Manila, Rizal and North Luzon. So essentially, with this portfolio, it makes us a nationwide player -- a nationwide player with scale and now we are the leading ITCs in Philippines with this acquisition. And second point that the that you see here is this will also give us the first mover advantage because the rest of the other, I would say, smaller ITCs to a certain extent, are predominantly operating in the North. So without scale, I think it's always a chicken and egg situation for them to move out to the southern part of the country. But with us with the scale and all this, we will definitely have the preferred partner for PLDT to probably build another MNO perhaps to probably build and progress in this area. Second, as well -- secondly, I think if you look at -- if you look at this, the quality of assets that we are getting in this are also better quality assets because more than 90% of these assets are [indiscernible] GBTs, of which more than 70% have got high of more than 40 meters. What that means is it's suitable for colocation and it also allows for higher possibility to cater for higher tenancies, right? So I think with this, it actually is a game changer for us in the Philippines, given that from a small player in the northern part of Luzon, we suddenly become a nationwide player which at this point, we are the only 1 that have a nationwide play, right? So if you move to the -- if you look at one of the things of the southern part of portfolio that is probably worth mentioning as well is the lease rate in this area are probably -- in the southern part area are also a lot cheaper as compared to the northern part, right? On average, the lease rental -- the land lease rental are probably 40% to 50% cheaper than the northern part. Having said that, we know that the operating cost in the southern area are probably slightly higher as compared to the north given the widespread of the area. Even with that, the savings that we are seeing from the lease rental will more than offset the higher operating cost that we've seen in the southern area, right? So given that the rental lease rates are probably making up the big chunk of your total OpEx. And that's why you probably see a higher margin coming from the Southern portfolio. If you can move on to the next slide. So here, you can see some of the acquisition rationale. I think some of it, we have started the robust macroeconomics in Philippines. And I think more important for edotco, we are enhancing our presence in the emerging markets and strengthening our Pan-Asia platform. In some of the -- in Philippines, for example, the cost of capital are too much lower as compared to some of the other markets that we are present and which is closer to even to Malaysia. So this we sort of manage our risk profile to a certain extent, right? So we are the leading ITCs in Philippines. Of course, the significant build-to-suit rural side colocation, we'll talk about that at a later slides as well. And again, I think one of our key strengths is that we are able to leverage on our operational excellence that we have in our operation in the 9 other countries that we already present, we'll talk a little bit about that as well, right? And it's also about diversification and optimization of our portfolio, right? So maybe let's move on to the next slide. So as you can see that the Philippines as a country have shown a significant improvement in terms of -- progress as well in terms of its macroeconomic from GDP growth, right? And in the next 3 to 4 years, they are looking at around 7.7% growth. In terms of rating, there has been a continuous improvement. Today, they are BBB+, and they are already above the investment rate. What is also more important to see that more in the region, Philippines has got the highest population growth, with an increasing urban population percentage. And this is growing at a very fast rate. So all these indicates that with all this progress, we are seeing that potential growth coming up from the income level of people in Philippines and that would probably drive more consumption as far as telecommunication services that will probably drive more of the infrastructure that's probably required to cater for that. Next slide. Okay. So Philippines is a strategic market for us. If you look at Philippines today and you compare it with countries around the region, from a coverage perspective, today, they are probably lagging behind some of the peers in the region, right? So if you look from a population coverage perspective, they are probably close to 90%. However, from geographical coverage, they are probably close to only to about 40%. So there is a lot more room for expansion and growth that we are seeing in Philippines. And you can see as well, in Philippines that in terms of how mobile data traffic are growing year-on-year in Philippines. As you know that they are very high in terms of -- in fact, they have got the higher usage of social media in specific with regards to Facebook and Instagram, right, it's one of the highest usage globally, Philippines, and this is typically dominated by the younger generation. So all these tells us that there is significant room for growth in terms of the telecommunication industry in Philippines moving forward here. At the same time, I think they already started rolling out 5G. And I think today, it's still very small, but I think that would also -- this will also be one of the other catalysts that's probably going to drive the infrastructure growth that's required. So with Philippines today, if you look at our portfolio, it will sort of rebalance our portfolio a little bit from frontier to emerging markets, right? In addition, if you look at -- with the addition of Philippines, it's sort of replaced with the -- at the size that they have, it sort of replaced the portfolio that we have in Myanmar that's currently going to -- through some challenges. And you know the situation in Myanmar. And hence, our presence in Philippines is going to be important in terms of optimizing and diversifying our portfolio. Next, just a little bit of a comparison where we are, where do we stand as compared to the other global tower companies once we complete this transaction. Post transaction, with 54,000 towers. We are the sixth largest independent tower company. And of course, regionally in Asia, we are -- Asia actually India and China, we are probably the largest. Next. This is what we're trying to reflect here is to show the growth potential that we would potentially be seeing in Philippines market. So today, we have approximately 100 towers with about 300 build-to-suit orders predominantly grow, and with the SLB and the build-to-suit commitment that we have, that will take us to around 4,200 towers, right? And that means that with the existing 25,000 towers that we have Philippines has -- the industry has today, we have approximately 17% market share. But based on the target that is set by the ITC, the Department of Information and Communication by 2026, they are targeting to go to around 66,000 towers. And that means there will be an addition of around 41,000 towers over the next 4 years. Given that we have the first-mover advantage, assuming that we are able to take 40% to 50% of the share over the next 3 to 4 years, I think that would probably bring our market share over 30%, right? And you see this growth that the regulators are pushing actually pretty aggressive, from a 25,000 towers they are looking to add close to probably around 10,000 towers a year, right? So a pretty aggressive target that has been set by the regulators, right, for the industry players. So there's a lot of opportunity and growth opportunity that we see coming up. Next. So I think we have already talked about this. This is the assets that we're acquiring as I said it's a good quality asset with high colo potential because we see that less duplicate sites and less parallel sites that we see in the southern area, on this slide. So its practical problem is that it's also very critical from operations standpoint in this area as well permitting is a lot easier than getting permits in the northern part of the country -- northern part of Luzon. So I mean, that will help accelerate in terms of your delivery timeline for MNOs to roll out in this area. Next slide, please. And we know that we are able to leverage once we have done this acquisition, our focus is to really quickly integrate this operation into the group and see how we can realize the synergy very quickly. Our business model today centered around shared-service centralization where shared IT platforms, even in terms of innovation center of excellence is all on a shared basis, right? With this, we are able to leverage on all the shared services, for example, to service and cater to the needs of edotco Philippines and to a certain extent at very minimal cost. So also, once we are able to integrate this operation quickly into the edotco group operation, we are pretty confident that we are able to realize the synergies coming out of this. And that would probably help in terms of driving a lower cost structure in edotco Philippines as compared to probably some of the other ITCs that probably have a stand-alone -- on a stand-alone basis. So last but not least, I think one of the key advantage that we have in terms of coming out with an integrated innovative solution predominantly today in terms of tower design, also in terms of power solution that we have because this will essentially give us the competitive advantage as we are able to leverage on new technology, for example, to drive our operating cost down. So by leveraging on what we have at the group, we believe that we are able to extract synergy from the operation -- in-country operation. If we move on to the next slide. So we can see -- I mean, what does it mean, right? By adding Philippines into the portfolio, you see from tower count today, it will account for approximately 6% of the total group tower count. And from a revenue standpoint as well, right, with Philippines today, Philippines post transaction, post-closing, I think Philippines will account 30% of the total group revenue. And if you look at the size, it's quite similar to Myanmar's revenue. And given what happened in Myanmar, it's quite important that we diversify our portfolio. And Philippines can easily step in into the Myanmar chose to cater for whatever gap that possibly might arise. So from an EBITDA standpoint, I think Philippines will contribute close to 16% of the total group EBITDA, which is going to be quite sizable to a certain extent. And I think Philippines as well, given what we see, how they progress, and I think we would actually have a lower cost of capital in Philippines, which is actually closer to other emerging markets, countries like Malaysia, Thailand and so on. And I think if you look at the purchase consideration at a lower cost of capital today and the EV per tower, based on our transaction today is at around 270,000. And I think looking at the better MSA terms that we have with a longer tenure tenancy that we are signing -- contracts that we're signing with globe, the 270 is quite comparable or quite a fair and reasonable as compared to some of the recent deals that we see probably if you were to compare with the STP deal in Indonesia, which was the most recent one. Next slide, please. So this is probably forma in terms of how we look at this thing. So this is looking at 2021 pro forma from a number of towers. And I think in terms of the portfolio, I think the PLDT portfolios carry EBITDA margin of close to 76.4%. And with this addition, it's actually resulting in a higher EBITDA margin post transaction to the overall group. And I think similarly for -- it's a chunky contribution to revenue as well as EBITDA to the group. Yes. I think -- so that's all I have for the presentation on edotco. Maybe I will pass to Vivek to run through the presentation.

Yes. Thank you, Adlan. I think just continuing with our focused execution strategy of Axiata 5.0. If you recall in, I think, 2020 we talked about the strategy. Two areas which I will focus here on is the growth areas and the portfolio optimization value elimination. I think this transaction fits into the clear strategy of Axiata 5.0 on these 2 biddings. If you look at our growth, we've said mobile growth is going to be low single digit. If our future growth has to come, it has to come through adjacencies, which is infrastructure business, digital business, enterprise business and fixed broadband business or fiber business. And those are the areas of growth for us in the future. And this is one of the transactions or edotco's strategy is pretty much aligned to that. In addition to that, we are also looking at how does these growth areas or adjacencies eventually translate into value elimination for us and potential monetization at appropriate time for us. I think those are the 2 areas which we will continue to focus on and pretty much in line with what our strategy of Axiata 5.0 is. If I can move to the next slide. So I think this pretty much explains what I said just now, where we see these 4 blocks and as you go up the ladder in these 4 blocks, we see higher growth coming in digitally followed by enterprise infrastructure and fixed and some of the actions, which has been taken this year are in line with our strategy. One is mobile focused on the market consolidation, which is translating into the merger in Malaysia. Also, there's a merger happening in Indonesia, which also helps in that sense. The fixed strategy is coming through the acquisition of Link Net, which I think the process is currently underway. As far as infrastructure is concerned, I think we've done around 4 transactions, 3 pretty much in the last 4 months buying nearly 1,000 towers in Malaysia, 1,000 towers in Indonesia, and now these 3,000-odd towers in PLDT in Philippines. So that's part of the infrastructure focus. Enterprise, we continue to do at this point in time, big-size acquisitions, which is supporting the growth of the enterprise as well as the organic position on the enterprise. We would see further investments going into this area for us to continue growing the opportunities on enterprise. Digital business, I think clearly, we are looking at converting these 2 businesses, AD and BFS over a period of next couple of years into becoming Unicorn on their own and potential opportunities to monetize the investments made in these businesses here. Next slide. So I think on a pro forma basis, we do see marginal impact coming on profitability, essentially coming out of the fact that at this point in time, it has been 100% funded through debt, which may not be a position in medium terms, we would look at getting investor at the project level or even at the holding company level to support the investment into this acquisition. And consequently, there has been some impact on our leverage level, which moves up from 2.56x at the end of last year to around 2.87x, essentially coming out of the same reason which I explained earlier, which is that this is 100% funded through debt. Next. So I think that's pretty much we wanted to talk about, the edotco perspective as well as Axiata perspective. And just to summarize from a or maybe quickly, I can do that, and then maybe Dato' can eventually summarize. I think it is pretty much in line with our strategy, which we had alluded to the investors sometime in 2020. Dato' to you, maybe you want to summarize that.

Yes. Thank you, Vivek. So that's the short presentation by Adlan into the perspective and the approach strategy that we thought through in approaching this particular acquisition. And as you can see, the opportunity, the economy, the market, the penetration rates of mobile penetration in Philippines is encouraging. Vivek alluded to the suggestion of -- Vivek suggested that we could -- or we are looking at bringing investors, as I've mentioned at the outset, there were 16 bidders that started this process that were involved in this beginning of the process. As it turns out -- as the process progressed, a few of them were approaching us because they couldn't make the cut, so to speak. Now we are certainly in a good position to, well, perhaps bringing 1 or 2 investors at the project company level. Vivek mentioned the holding company level, but that's more of the Philippines investment holding company level, not at edotco group level, yes, just to be clear. We're in a sweet spot in terms of trying to -- there are the many takers for -- there are many interested parties for the assets. So we -- as it turns out, PLDT accelerated their timeline, their process and we decided to close this first before bringing in other partners in due course. So that's one -- one consideration, if you like, of this transaction from holding from Axiata's perspective. And perhaps we have 2 questions to hands up. I'll pass over to Clare to take charge.

Thank you, Dato'. [Operator Instructions] So as a start, let's go to Piyush from HSBC. Piyush?

Can you hear me?

Yes.

Yes, Piyush, we can hear you. Please go ahead.

Congratulations to the entire team on this deal. A few questions. Firstly, if we step back and look at the landscape in Philippines, you mentioned there are 25,000 towers at the industry level. Can you also share what is the tenancy ratio at the industry level? And what is your realistic expectation of towers and tenancy over next 2 to 3 years in Philippines? And the portfolio which you have acquired around 3,000 towers, are you already in discussion with potential new tenants? Like what is your expectation for this portfolio of tenancy ratio in next 2 to 3 years. You have given -- the third one was on the EPS, you have given the impact -- pro forma impact. But what is the cash impact of this deal because there is an element of DNA. So if you can just elaborate what is the cash accretion post this deal? And what is the cost of debt which you have assumed to calculate this pro forma numbers?

Adlan, do you want to take those questions?

Yes. Yes. So thank you, Piyush. If you look at the industry today, the tenancy ratio is 1 year, Piyush, I mean the industry don't share the infrastructure today. But I think this is with -- I think, over the last 1 year or so, with the introduction of the common tower infrastructure policy, I think we actually see the emergence of independent tower company. And you can see that MNOs are starting to farm out the build to independent tower company. And that means that with the images of tower company, they are pretty open into sharing. And that's why you see that this deal will be the first step towards building a sizable independent tower market to serve the MNO as well as the consumer in Philippines per se. So you would expect that these numbers, the tenancy ratio to start increasing after this. And I think if you look at -- maybe Italy, you can give the detail. I think in the next 3 years, I think we were looking at the tenancy ratio of about 1.3, so in the next 3 years.

Yes, if I can add maybe a bit. We are looking at [Technical Difficulty].

I think we lost Anthony.

Can you hear me, Clare?

Okay. That's better.

Okay. Just to add on the colocation assumptions that we are looking at are relatively conservative. We are projecting 1.1 in 2022, 1.2 next year, 1.3 in the following year. Obviously, there's a lot more upside than that. And we feel that the assumptions that we have taken are relatively conservative relative to the data points that we have. And we -- obviously, there's going to go a lot higher than that and to trend towards 2 over time and even on the build-to-suit we go mildly above 2.

Okay. And can you repeat the question, Piyush, on the...?

That was on the cash impact.

Yes, the cash impact of the deal and the cost of debt, which you have kind of assumed in the pro forma numbers?

On the cost of debt that we have assumed, I think it's about 5% for the U.S. dollar funding. And I think when you talk about the cash impact, from a depreciation perspective, based on the pro forma in ringgit amount, the impact of the depreciation is about close to MYR 240 million.

Got it. And if I may ask, like on the colo, PLDT yesterday mentioned of the colo discount. Can you confirm like what is the agreement on the co-location discount to the new tenants on the first and the second tenant? And also, if I may ask like what is the maintenance CapEx on these towers -- recurring maintenance CapEx?

So I think yes, there is a colo discount. I mean I think that's similar in terms of business model that we have in terms of other markets and even what we see in Malaysia as well. There is a 20% colo discount that we'll be able to enjoy by PLDT if a new tenant comes in. And that only applies to probably MNOs, and for non-MNOs and all, the 20% does not apply.

Got it. And just final one, maintenance CapEx of these towers on a recurring basis?

We assume -- I mean, for maintenance CapEx, we are talking about close to -- just under USD 100,000 per tower colo CapEx.

No, maintenance CapEx, Anthony, maintenance.

Let me come back to you.

Piyush, we'll come back to you.

So let's move on to Isaac from Affin.

I have 2 set of questions, please. For the first set of questions on the government inspiration to have 66,000 towers, are they giving out any incentive? And what are they doing to encourage these new [indiscernible]? And broadly speaking, how much would the CapEx required for a new tower? I mean, broadly speaking. That's question #1.

Okay. So at this point in time, we have not seen any incentive coming from the government to drive this -- to drive this coverage -- to drive MNO to expand. However, there is a push from the government to make sure that the quality of service is up to a certain level. So they are driving it no incentive, but driving it from a quality of service and pushing the MNO to meet the quality of service. I presume at some point in time, given that if they are pushing this to make sure deliver at the site, I think there will be more, I would say, push in terms of -- either in terms of new regulation and all that to drive MNO to improve this coverage. At this point in time, I think we have not seen any. And I think from a CapEx perspective, it depends on the high, but for typical GBT CapEx -- ground-based tower CapEx, it ranges from USD 65,000 to about USD 90,000.

Second set of questions is on the accounting front. I have noticed that the accounting base -- the pro forma P&L impact based on the presentation slides and the announcement is slightly different on the EBITDA. Can you enlighten -- can you just confirm that the pro forma EBITDA of [ $200 million], it's a more accurate version, if I may use it. And sorry, just one more question. Can I just confirm that just now you're guiding that the depreciation is MYR 240 million?

Yes, D&A.

D&A is 150 as per the announcement more or less.

Yes, 150 million.

150 million. All right. And in terms of EBITDA, based on the announcement, it's more like 98, while the presentation slide is 200 million. So which 1 will be the more accurate figure?

Just to clarify, EBITDA there in the announcement is net of expenses, which would be also netting of leases payments, whereas the [ 227 ] or whatever the number was there was pre-lease payments. So there's a difference in that number.

So let's move on quickly. I think next in line is some phone from CIMB or sorry it's Alex from [indiscernible].

I have 2 questions. The first is you mentioned that because of D&A, you are going -- this acquisition is going to be slightly negative to the group's earnings as far as EBITDA -- edotco is concerned, I'm just wondering, when do you expect breakeven on net profit level? And what kind of assumptions would you be looking at in terms of tenancy ratio and perhaps your actual rental rates? That's my first question. And my second question is regarding your debt levels. It's moving towards the 3x level, which I think what you mentioned before in the past, it used to be your kind of cap level. What are you planning to do once it reach that? Are you planning to pass forward your listing or edotco? That's my second question. And my third question, could you provide us a bit of color on the kind of pressure on the rental rates for infrastructure projects. I think in Indonesia, I mean, there were renegotiations by clients, right, to bring down rental rates. I'm just wondering in the Philippines is that the current situation now.

You're referring to land lease? Land lease rental, right?