Axiata Group Berhad (AXIATA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Clare Chin, Head of Investor Relations at Axiata Group Berhad. Thank you for standing by for Axiata's Third Quarter 2022 Results Briefing. Today, we have present with us Dr. Hans Wijayasuriya, Joint Acting CEO and CEO Telecom Business; Vivek Sood, Joint Acting CEO and CFO; as well as representatives from our operating company. There will be a short presentation followed by a Q&A session. Lastly, 2 key housekeeping reminders. You will be on mute throughout the presentation. Also note that we will aim to end promptly at 4:30 p.m. today. So without further ado, I'll hand over the conference to Vivek.

Thank you, Clare. A very good afternoon, good morning, depending where you are. Let me go through the quick summary of the -- executive summary of the performance for Q3. Just a headline, I think we've had a fairly strong underlying operational performance during the quarter despite the macro challenges which we are facing in some of the markets. Having said that, let me start with the reported numbers for the year-to-date. Revenue has been growing fairly strong at 7.6%, EBITDA at 9%. However, profit has been impacted because of the unrealized -- mostly unrealized ForEx losses coming from the loans we have in the group at Corporate Center, Dialog and somewhat in Bangladesh, which is Robi. As you know, most of the currencies have actually weakened against the U.S. dollar. Having said that, I think strong underlying performance with the revenue growth coming at 10.7%, EBITDA coming at a growth of 10.8% and the EBITDA margin remaining fairly stable at 44.6% and EBIT growth at 31.5%. If you recall, one of the KPIs we had set for 2022 onwards is our EBIT focus. And the underlying performance profits, plus 19.1%. All operations have done extremely well, except Dialog and Ncell. Dialog for the macro situation in that market. Ncell has been some regulatory changes specifically coming out of the interconnect rates and also, to some extent, profits impacted by the prosperity tax, Cukai Makmur, in Malaysia and increased finance costs coming out of the acquisition debt, which we took for acquiring the Link Net business in Indonesia as well as the Tower business, Towers in Philippines. Adjusted OFCF. Adjusted OFCF is basically -- OFCF adjusted to the ROU assets, which is minus -- which is around close to minus 4.5%, around MYR 2.2 billion and adjusted one is minus 19.5. And largely coming out of the impact of the Tower's acquisition in Philippines. The Tower acquisition because this is acquisition of Towers and not the acquisition of company have been classified under the OFCF as CapEx. However, when we look at the numbers subsequently, you would see those numbers without the Tower acquisition numbers. Gross debt-to-EBITDA has been higher at 3.2% -- 3.2x, mainly coming out of the acquisition debt as well as the fact that most of these acquisitions, EBITDA has still not been consolidated fully. We expect this to be tapered down on account of the proceeds, which we are expected to get from the merger in Malaysia and also the fact that we will start consolidating the full EBITDA of the acquired companies going forward. Healthy cash balance at MYR 7.7 billion. Proforma gross debt-to-EBITDA, excluding the M&A, is around 2.74x. I'll now hand over to Hans to talk about the mobile and telco businesses, their performance.

Thank you very much, Vivek, and good afternoon, good morning, everyone. I won't go into too much detail at this executive summary level, we'll catch up again down the deck in terms of detailed performance. But broadly, Celcom delivered a very strong quarter with double-digit EBITDA growth. And in the absence of the 3G, accelerator depreciation, which featured in the corresponding period, both EBIT and PATAMI demonstrated growth of close to 100% in cases. In Indonesia, we have a improving pricing environment as far as the mobile sector is concerned and revenues grew by 9.2%. In Bangladesh, Robi did extremely well this quarter. And we have registered a PATAMI increase of 38%, if not for the drag from ForEx losses which brought PATAMI down to negative 66%. So these are -- a country, again, in addition to Sri Lanka where ForEx losses have begun to bring down reported performance. Dialog, strong recovery in this quarter with respect to project resilience delivered good quarter-on-quarter growth. 21.7% revenue growth driven by data and having business. But we can see the results of most of the efforts put together to rationalize cost as well as to localize the business operations as a resistance to the ForEx environment. In Nepal, Ncell exhibited shortfall in voice, further exacerbated by higher costs and PATAMI fell 17.8%, in this case cushioned by lower taxes. We're going through in greater detail later on. In Cambodia, Smart delivered a 9.4% increase in service revenues, but this was offset by one-off impacts of micro regulatory fees. In Indonesia, again, Link Net, which is our newest telco subsidiary, 3 million homes passed and a penetration rate of around 27% (sic) [ 26% ]. Revenues declined on a year-on-year basis largely due to a higher churn rate. But we see that all efforts are being directed at turning around this performance towards a growth trajectory in the quarter to follow. I'll hand back to Vivek on the digital services.

Thanks, Hans. Just to cover quickly on our Digital business and Tower business. Boost, which is the financial services business, has been doing well on revenue with a focused growth in the lending business. We have both across Indonesia as well as Malaysia lend around close to MYR 1 billion, and we have currently around -- a loan book of around MYR 180 million. And that's what is translating into a strong 30.1% growth -- in revenue. However, we did have an impact coming out of on the profit EBIT line, mainly because of one-off increased NPL on account of [ fraudulent ] case, which actually helps us improve our controls in that area. Continues to do a strong performance on user base with over 10.2 million and merchants, around 538,000 merchants across the country. ADA continues to deliver well. Their core business of customer engagement, the e-commerce enablement has been doing well. However, their digital business has been impacted -- digital marketing business has been impacted mainly because of the reduced marketing spend across the region on account of impact on the overall market sentiments. Edotco, I think a combination of both inorganic and organic focus has been driving a strong performance. We've seen growth in the Colo moving up to around 1.64x and strong performance coming from some of the markets like Bangladesh, Malaysia and Cambodia. In addition, the acquisitions in Philippines as well as Indonesia have been now consolidated into the overall portfolio of edotco. Having said that, profit -- strong EBIT growth, profit impacted by partly because of ForEx losses and also on account of increased finance costs coming from the debt acquired for these new tower acquisitions. I think we are happy to say that we do expect ourselves to deliver better than the KPIs, which we had said at the beginning of the year, which were in terms of revenue as well as EBIT. We do expect high single-digit revenue, and we do expect EBIT growth of -- in 30s. And having said that, I think we do expect challenges coming from the headwinds in macro markets, macroeconomic situation in Sri Lanka, Bangladesh and obviously, the developments in Myanmar. The Myanmar is one of our overall net assets is still a very small percentage for Axiata as such. I'm also happy to announce an interim dividend of [ MYR 0.05 ], which would be equivalent to MYR 460 million payout. If you recall, in quarter 2, we did announce a deferment of the dividend on account of pending merger in Malaysia as well as the developments on the macro environment. Now I think we are pretty confident of the merger getting done. And also, on a macro standpoint and also cash flows overall, we are much comfortable to be able to announce an interim dividend of MYR 0.05 for [indiscernible]. Maybe let me continue quickly on the reported results, reported performance. As I said, quarter-on-quarter, a very strong 8.3% growth. Year-on-year, 11% growth on revenue, translating on year-to-date around 7.6% coming from all OpCos, except in Nepal and the translating into strong performance coming on the EBITDA line as well as EBIT. Our profit, as I said earlier, have been impacted by on account of the ForEx losses. I mean cumulative for this year has been around MYR 1.2 billion. Out of around MYR 950 million has been on unrealized losses, and the balance is coming on account of realized. Unrealized is mostly under the long debt 30-year bond, which we have at the group level, which for good reasons, we have decided not to hedge. So that's, I think, where the impact is coming. Hopefully, in quarter 4, with the movement shift in the ringgit, which we've seen in the last couple of days, should help us recover some of these unrealized losses. If I go to the next slide, which is the -- sorry, the underlying performance. The underlying performance has been strong, year-on-year growth of around 15.9% and quarter-on-quarter growth of 9.5% and year-to-date growth of 10.7%. I think this growth has come across all markets, very strong performance across all markets. Ncell impacted because of the voice revenue. This does include the consolidation of Link Net revenue for a full quarter, which is around MYR 321 million. If I exclude that, the year-to-date growth is around 8.5%. So still a very strong organic growth coming in for the year. And that's basically translating into the strong performance on the EBITDA line for us with the margins being fairly stable at 44.6% and flowing down of that into the EBIT line, which is around 27% growth from -- on account of the year-on-year 31.5% growth coming in on EBIT on a quarter or a year-to-date basis, effectively translating into a strong 19% growth on the PATAMI -- underlying PATAMI on a year-to-date basis. This is just a waterfall to demonstrate how we have performed on a year-to-date basis on our underlying PATAMI. As I said earlier, most of that impact coming out of strong EBITDA performance. However, to some extent, offset by D&A, which is coming because of the increased investments, specifically coming into the tower business and also inclusion of Link Net and net finance costs mainly on account of the acquisition debt. Tax has been higher because of 2 reasons. One is the profits being -- the profit before tax being higher and also the fact that we did pay one-off taxes -- Prosperity Tax in Malaysia, which is around MYR 130 million. The -- and if I look at the reported losses, the underlying, as I said earlier, main impact is coming out of the ForEx movement. Cash flows. Adjusted cash flow marginally down at around 20%, mainly coming out of the new tower acquisitions, which we did in Philippines. And if I look at on a country-by-country, it's -- partly impact is coming from the -- from Dialog, which has been essentially because of the lower EBITDA consequent to the ForEx impact as well as the inflation of that particular market. Balance sheet. I think one-off impact, which I talked about earlier, on increasing the gross debt-to-EBITDA to around 3.2x, which we believe is temporary. I think we should be able to pay down some of the debt coming out of the proceeds from the merger in Malaysia as well as the payback of shareholder loan, which is currently given to Celcom. The debt profile, maturity profile, you would see that we have around 28% of that sitting 1 to 2 years. Most of that will be taken out with the few activities being done as, for example, rights issue in Indonesia, the proceeds from Celcom-Digi merger, which should be used for pairing on some of the short-term debt and also the refinancing of some of the short-term debt in markets like -- in businesses like edotco. Cash position of MYR 7.7 billion, mostly at Celcom, XL as well as the edotco and some of that sitting in the Corporate Center. I'll hand over to Hans on -- to cover Digital telcos.

Thanks, Vivek. Starting with Celcom. As I mentioned earlier, strong double-digit EBITDA growth. Two contributing drivers there. Revenue grew by 3.9%, driven largely by the prepaid business as well as the consolidation of the new subsidiaries on the enterprise front, Bridgenet and Infront. Also importantly, an improved performance in OpEx, in particular, sales and marketing as well as bad debt performance and reduction in the dealer incentives based on the new operating model. EBITDA, therefore, grew by 12.4% and margin improved by 3.8 points. Good flow-through from EBITDA with EBIT increasing by 96.1%. And in the absence of the accelerated depreciation benefit, which I mentioned earlier, this also exhibits underlying increase of approximately 50%. EBIT margin increased by 42.5 points and in terms of underlying improvement translates to 6.7 points, if we were to ignore the differential accelerated depreciation. PATAMI recorded at MYR 856 million, which is an increase of 65.3%, again, driven by the EBIT flow through and offset by the higher taxes, which already mentioned by Vivek. Cash flow is strong with FCF increasing by 17.8%. And also a strong drive out this being the flat CapEx at around MYR 555 million. Moving on to XL. Revenues grew by 9.2%, stabilized yield environment or pricing environment in post Lebaran period. And ARPU is hardened from IDR 36,000 to IDR 38,000. EBITDA and EBIT, both lagged revenue growth, however, due to increased OpEx in direct costs, the sales and marketing expenses and regulatory costs. We also see an increase in depreciation and amortization. EBITDA grew by 4.8%, with a margin compression of 2 points and EBIT grew 8.4% with flat margins at around 12.5%. PATAMI fell moderately by 3.5% due to higher finance costs and lower one-off gains, in particular, the disposal of the [ quicker ] sales in the previous year and compared with the tower sale in the current year. Free cash flows grew by 14.3% on the back of a flat CapEx of MYR 6.3 billion. In Bangladesh, as mentioned earlier, good performance with revenues up by 4.5%. Strong OpEx performance, lower direct and staff costs as well as in spite of moderate increase in network expenses. Overall, EBITDA and EBIT outpacing topline growth at 10.3% and 23.9%, respectively. EBITDA margin improved by 2.4 points and the EBIT margin by 2.2 points, overall demonstrating the improving operational efficiency of Robi. PATAMI, however, dropped to -- dropped by 66% due to the ForEx loss on U.S. dollar-denominated borrowings and higher finance costs, albeit cushioned by lower tax expense. If, however, we normalize the ForEx loss, underlying PATAMI grew by 38%, which demonstrates the strong underlying performance of the company. Cash flows grew by 43.8% and CapEx reduced by 17.3% on top of the EBITDA flow-through driving free cash flow, as mentioned. In Sri Lanka, Dialog's project resilience delivered quarter-on-quarter growth, reflecting group-wide efforts to rationalize costs and also to localize business operations as far as possible. Revenues grew 21.7%, driven by data and [ hubbing ] business. However, increased network costs, which are mostly denominated in U.S. dollars as well as increase in depreciation and amortization led to EBITDA, declining by 4.5% and EBIT by 35.4%. The EBITDA margin compressed by 8.9 points and EBIT margin was compressed by 7.7 points. PATAMI grew over 100% with on -- in this quarter with ForEx loss of LKR 32.9 billion. Excluding ForEx loss, PATAMI declined by negative 47.3%. In terms of free cash flows, we have an impact of 100% -- over 100% impacted by the higher CapEx of LKR 40 billion and unfavorable ForEx movement against the U.S. dollar compounded by a decline in EBITDA, as described earlier, largely driven by inflation and ForEx. In Nepal, Ncell exhibited a shortfall in the voice business and also an increase in OpEx. Voice revenues declined by 9.4% and ILD business by 11.2%, cushioned by data growing by 12.2%. However, the growth in data was not sufficient to compensate for the reductions in both the ILD and voice revenues, resulting in revenues declining overall by 3.4%. Increased OpEx, both direct costs and admin costs, led to compounded by the revenue decline resulted in EBITDA falling by 13.7% and EBIT by 26.1%. EBITDA margins were correspondingly compressed by 6.2 points and EBIT margin by 7 points. PATAMI fell accordingly by 17.8 points driven largely by the net finance cost, but cushioned by lower taxes. CapEx was flat at [ NPR 4.1 billion ] and in spite of the negative EBITDA flow through -- combined with the negative EBITDA flow through related to the free cash flow declined by 18.5%. Smart delivered strong revenue growth at 9.4%, driven largely by increase in data revenues by 12%. However, increases in direct costs as well as the one-off microwave fees -- regulatory costs related to microwave fees and network-related costs led to EBITDA declining by 1.8%. PATAMI declined by 39.6%, impacted by the one-off penalty fee for microwave, as mentioned earlier, and higher tax from the reversal of deferred tax assets. Free cash flows grew by 24.4% on the back of a CapEx reduction of 24.8%. Our newest subsidiary, Link Net, in terms of revenues year-on-year declined by 1.6%, largely impacted by the higher churn rate due to expiry of promotional contracts as well as the pandemic effects over the past 1 year. Some direct cost increased in particular higher staff costs, bad debt and depreciation and amortization. Accordingly, EBITDA fell by 12.7% and EBIT by 49%. PATAMI fell 64.8%, driven by a flow-through from the lower EBIT and also higher net finance costs. Free cash flows declined accordingly with increased CapEx and lower EBIT. With that, I'll pass it back to Vivek to cover the digital subsidiaries.

Yes. Thanks. Let me start with first Boost. Boost revenue, as I said earlier, continue to grow well with the lending business coming in with a strong lending portfolio across both Indonesia as well as Malaysian market. EBITDA, as I said earlier, had an impact coming in -- on increased costs to support the growing lending business as well as the one-off impairment of debt on account of a fraud, which we had in the quarter. This translating into a cash flow improvement of 5.4% and PATAMI being marginally lower on account of slowdown from the EBIT numbers we have. ADA, I think, as I said earlier, continues to do well on customer engagement, which is a large part of the ADA portfolio and e-commerce enablement business. If you remember -- recall, we did acquire this company last year and which has been doing really well in these times of building e-commerce enablement business. And that's basically translating into quarter-on-quarter growth of 10.1% and year-to-date growth of 11.7%. Having said that, I think we've increased costs, higher cost have been impacting the EBITDA and increased cost comes mainly because of the fact that the marketing -- digital marketing business, where the revenues have started tapering down because of the market spend on advertising, has come down. However, we have a fairly large cost base to support that, which is now being kind of rationalized or looked at as we go forward given that we do expect the advertising revenues to keep at a lower levels. Profit still fairly strong for this business, growing at 3.9% on a year-to-date basis at MYR 46 million for the first 3 quarters. Tower business, as I said earlier, is a lot coming out of both organic as well as inorganic play in this business. The organic growth is coming from predominantly Bangladesh, Malaysia and to some extent, Cambodia. And this is coming from both Build of Colos as well as build to suits in these markets. Malaysia is essentially coming because of the new orders coming from the DNB side of the business. And Malaysia, Philippines, Indonesia have also to do with the inorganic contribution from the recent acquisitions which we did. However, there is impact on profit because of higher finance costs and one-off tax in Malaysia, which is the Cukai Makmur. The free cash flow here, you would see a fairly depressed number. That's because of the Towers acquired in the Philippines have been treated as CapEx. So I think from -- as I said earlier, I think we expect ourselves to deliver a strong performance against the KPIs, which we had set at the beginning of the year. We do expect revenue growth to be ahead of what we said as mid-single digit expected to be at high single digit or the short of double-digit growth and a strong EBIT growth for the year, whereas we have said high single-digit growth. CapEx is in -- we expect ourselves to be in line with what we said at the beginning. However, this is excluding the CapEx on account of the new towers acquired in Philippines and some of the other markets. So that's pretty much. I'll hand over back to Clare. Clare, over to you.

Okay. Thanks, Vivek, and Dr. Hans. So as usual, we will proceed with the Q&A session. We are also joined by Axiata's group-wide colleagues. We have from Celcom, CEO, Datuk Idham; edotco CEO, Adlan; Dialog CEO, Supun; as well as from ADA, Srini, CEO of ADA. So this is in anticipation that you may want to direct your questions directly to them to better understand our operations on the ground. So without further ado, let's move on to Q&A. [Operator Instructions] Okay. Yes, we do have a question from Piyush from HSBC. So perhaps, Piyush, you want to kick off the Q&A session. Thank you.

Can you hear me?

Piyush, yes. Please, go ahead.

Three questions from my side to kick off. Firstly, how are you thinking about the group leverage up after all the kind of corporate actions are completed, the M&A transaction? So maybe by end of 2023, where do you think it will settle down? Secondly, how is Board and management thinking about the dividend? Given large ForEx unrealized losses, would it be fair to assume it would be from your normalized PATAMI? And thirdly, on Indonesia, any further thoughts on combining XL and Link Net to maximize the synergy benefits?

I can take first two, Hans, and you can take the third one. Okay. No, I think we do expect the leverage to kind of settle down over the next 2 to 3 years. 2023, we do expect leverage levels to be higher at 3.2 level, but higher around 3 or slightly under 3. And the reason for that is, some of these acquisitions which we've made specifically in the tower business, are fairly debt-funded acquisition, and these will still take time for us to start getting the benefit of EBITDA. Having said that, I think we are looking at effectively some of the corporate actions to be taken, which we will over next shorter period of time provide more details around, which should help us bring down further leverage in our balance sheet. As far as the impact of unrealized losses comes on, yes, we do see the impact there on the overall balance sheet because of the currency translation because some of these markets, we really do not have hedging opportunities to manage the exposure on the -- that we have. Piyush, on dividend thinking. I think we've earlier talked about going to up to [ MYR 0.20 ] dividend by 2024. I think that will be effectively tapered down in our view and the details around that we will provide shortly. And taper down is because we do see opportunities on further investments, whether it's in the Tower business as well as the fiber Link Net business, where we would see some investments going and also the fact that the [indiscernible] in Malaysia will take a while to start delivering the dividend levels, which we were getting from Celcom in the next couple of years because of the early on integration costs, which would be incurred on this merger. So we do expect dividend to taper down. How much would that be is something we'll come back in more details here.

Yes, I'll take the third question on Indonesia. No plans on combining XL and Link Net at this stage in terms of corporate entity combination. However, synergy extraction and creating platforms for the reduction of OpEx as well as CapEx are well underway. And also at the marketing front, you might have seen the announcement of some joint products, converged products. Other areas of synergy are obviously on the sharing of the fiber networks and other infrastructures not -- both on the backbone side as well as submarine cable capacities, et cetera. Overall, we see great potential for the fixed business as well as the mobile business in Indonesia. And if we were to follow the delayering wisdom and the clarity that this provides, we believe that the 2 businesses have independent growth trajectories while a platform for synergy is not compromised at all.

Got it. Can I ask Vivek on the dividend? How should we look at more from a short-term perspective also? I understand you will give more clarity on 2024 path later on, but for '22, '23 in the interim, like how should we think about it?

So I think we will continue to pay dividend at the progressive levels which we've been talking about, but it will not go to the level of [ MYR 0.30 ], which we have communicated earlier. You can see this quarter, we did that interim dividend of MYR 0.05. So I think we do expect us to continue giving dividend, but not to the levels which we had mentioned earlier.

Thanks, Piyush. Let's move on. I believe that there are questions coming through from Ranjan from JPMorgan.

Two questions from my side. Firstly, there have been some agreements being signed with DNB. How do you foresee the 5G rollout in Malaysia in the coming periods? And if you have any indications on pricing -- sorry, on the pricing strategy? And second question is on these -- all these ForEx losses that you've recorded, I mean how should we think about the interest expense going forward, right? Like if -- these are related to your U.S. dollar debts or your foreign currency denominated debt, should we see like a step-up in interest expense going forward? .

So I think DNB, maybe we can ask Idham -- Datuk Idham to talk about it.

Good afternoon. Can you hear me? .

Yes, okay.

Yes. Okay. No problem at this time. Yes, a little bit about DNB on the rollout. I have not have any information on any change to the rollout plan of the DNB for variety of reason. I believe whatever that they're doing is as per the current rollout plan. And what we do is to make sure that our network is connected to their plan, to their network. So far, we have now integrated over 1,000 sites with their network. So that is progressing quite well. In terms of pricing strategy, there is not something that we probably can talk publicly because -- this of course, it's a competitive information at this point in time, yes.

Ranjan, I can take the second question. If you have a follow-up on DNB, then Datuk Idham can answer. Otherwise, I can go to the second question. .

Yes. I think we can go to the second part of the question -- second question. .

Yes. So Ranjan, we have around 64% of our debt on fixed interest, and it is -- most of that is fixed interest to maturity. And we have -- given the ForEx movement, we've taken a view of hedging at least at the group level where most of the dollar debt is on short term on coupons. So we don't see that impacting us substantially in at least in 2023 because of the combination of fixed interest loan as well as the hedges we've taken on coupons in the short-to-medium term. If this continues, then we would have an impact. But so far, we are not seeing that, given that it's in the nature of fixed interest. Yes, some of the markets where we do have, which is basically Sri Lanka as well as Bangladesh, where we have some dollar debt, we would expect the impact of currency movement having some impact on the interest payment. But I think if -- I don't think dollar impact would be that substantial as the interest rates increase in the domestic market or the liquidity would have an impact. .

Okay. Sorry, maybe one last question. If I look at your financials, if I look at the cash flow statement, for PP&E for the first 9 months, you record MYR 7.9 billion in CapEx versus your plan for the year at MYR 7.1 billion. So can you just understand the source of discrepancy? .

So that's what I explained, Ranjan, when I was presenting. That was CapEx. The towers acquired are classified as CapEx when we said MYR 7.1 billion, this was not including any towers acquired. I mean, towers acquired, where we have build-to-suit towers, they're rightly in CapEx. But these are towers which was more on acquisition towers, which was in Philippines, right, which is around MYR 2.9 billion, which was approximately MYR 2.9 billion is what we spent in acquiring those towers. That has been classified in CapEx, but in reality, it is like acquiring a company, right? So that was not something which was budgeted, which was not part of the original plan. So when you look at the CapEx numbers, you will have to exclude that MYR 2.9 billion and then compare with the MYR 7.1 billion. .

Okay. Thanks, Ranjan. I think we have a question coming through from Ken on UBS on the chat box. So the question is, basically, to arrive in the normalized 3Q PATAMI, there is an item called others of about [ MYR 117 million ]. What is the nature of that piece, the normal item on PATAMI of [ MYR 117 million ].