Axiata Group Berhad (AXIATA) Earnings Call Transcript & Summary

A very good afternoon to all of you on behalf of Vivek and myself, thank you very much for taking the time to be with us here this afternoon. And also for all those joining us online, welcome and thank you. So this afternoon has been traditionally the case, we have a very exciting lineup of presentation topics, discussions and panel discussions as well. And as always, we look forward to your feedback to make it an interactive event, an interactive discussion and also to learn from you with respect to your views and reactions to Axiata strategy as we move forward. We'll follow this short welcome with a discussion on Axiata's endgame, which Vivek and I will share some thoughts with you all on the priorities for the very short term as well as the medium term and the longer run. This will be followed by a discussion on our infrastructure business, EDOTCO, led by Adlan and we will then follow with 2 focus areas with respect to the ServCos or our Digital telcos. The Indonesian market comes into focus as one of our key players going forward and also the context of the headwinds, especially impacting our frontier markets at present. We'll move beyond the tea break into our digital businesses or our Techco businesses, featuring ADA and Boost, and also then follow up with an Axiata investor proposition, which -- to which we would very much like your feedback and reaction based on what you have heard in the earlier parts of the afternoon. We'll also have a survey as usual. And I think we aim to close on time with a good Q&A session between 5:45 and 6:30. So that's a quick rundown on the agenda. And -- but having preset this agenda, please, I think feel free to interject and provide your feedback as we go along.

Thank you, Dr. Hans. First of all, very good afternoon. Hans and I took over this role exactly or slightly more than 6 months back. So I think we've been doing this. And I think good news is that things which we've planned before we took on this role are falling in place. And the recent one is obviously the completion of the merger in Malaysia. So I think that's what was one of the key focus priorities for this year for us. Let me go through -- I mean I'll take back -- take you all back to 2020 when we had actually talked about our Axiata 5.0 strategy. And we have put these 3 pillars to focus, which is sustainable growth, operational excellence and structural changes. And those were basically converted into 10 key focus areas and some of them we will cover during the discussions today on what's been the progress against these elements. It was very clearly looking at a long-term sustainability of the business, which was through sustainable growth, looking at opportunities outside the core mobile operations. I think something which we'll touch upon on how we're progressing on some of those opportunities. Continued focus on operational excellence. We will not spend much time on that other than covering the stakeholder management, which is more around the ESG part and structural changes, which is industry consolidation and portfolio optimization, value elimination. Now I think that's something which has been following pretty well. I mean, while we've not been part of the consolidation in Indonesia, but the market is getting consolidated. Malaysia consolidation has happened with DG Celcom getting formed and we are looking at some of the opportunities around portfolio optimization, value elimination coming out of the other adjacent businesses, for example, Tower, digital businesses, et cetera. So we'll talk about that as we go along during the afternoon. Let me touch upon, I think we set some financial goals for ourselves. Financial goals were basically saying [ 5, 10, ] 2020, which was basically within 5 years, we should bring down our cost per GB at $0.10 and grow our EBIT margin to around $0.20 and should be able to give a dividend of $0.20. I think at this point in time, a checkpoint, September end, we are pretty much in line with what we said, which is cost per GB at that point in time was around $0.60. So we are now kind of down to around $0.20. We should be aiming to get to $0.10. Obviously, some efforts, some work to be done to get there. EBIT margin for September, if you see the results, is around 16%. EBIT margin moved up from 14% in 2019. It came down in 2020 because of the COVID. And then now I think this year has been fairly good performance across the OpCos to deliver good results, leading us to an improved EBIT margin. Dividend per share, I think in terms of what we are declaring is in line with what we said, but obviously, 2024, we'll touch upon require some adjustments as we go along because I think some of the decisions or actions we are taking is to create a long-term sustainable position for Axiata. And that's something will mean that there would be disproportionate investments going into deleveraging the balance sheet as well as improving the growth future opportunities here. So I think that's pretty much where we are on the -- on this topic, which we just wanted to touch upon before we get down to the next topic, which is unlocking future value. Okay. So let me start with this. I think 2019 to '24, I mean this is really about the journey of Axiata. How the past has been 2019, '21, '22 and how we look at the future. There are -- as Hans said earlier, there are very clear short-term goals, objectives to be met and their long-term position to be created and that requires Axiata to go through some transformation and improve or create maximize the shareholder value over a period of time. I think pandemic did give us some realization. 2020 was a year we went through difficult times. I think performance also got impacted because of the pandemic and the consumption while growing, but monetization was a challenge. I think most of the OpCos really focused on how do you retain customers at that point in time. And that did mean that you couldn't play around with the pricing and things like that during that period of time. I think 2022, all of us have seen, has been strong headwinds after the pandemic getting over on the macroeconomic side. And specifically, Axiata has been hit more because of our presence in frontier markets. And this is not just about looking at the impact coming because of the ForEx, but also the inflation and the interest rate increase and the affordability, consumption power of consumer is getting impacted. I think Sri Lanka has been the one which has been the biggest hit, I think during the course of the day Supun will talk about what has been done in Sri Lanka to take care of. And regulatory framework has also been a bit challenging. I mean Malaysia itself, we went through a lot of discussions around 5G and then DNB formation and all that, right, which is very different from the way we thought the market evolution will happen, how 5G will get implemented and this does change gears for us and focus on things which were not exactly planned. And not just Malaysia, I mean this was -- seemed to be the most stable market when it came to regulatory, but in 2021, '22, we've seen some developments here in Malaysia. In addition, other markets also, we've seen regulatory developments happening, which have been a bit of a -- not necessarily positive, but they have been something which requires us to adjust to the future as we go along. So immediate priorities for us looking at these situations was how do we deliver still a good, strong organic plans, which means if you leave aside the impacts coming on ForEx, et cetera, how do we ensure the underlying performance of all operating companies remain strong. So I think that was a key focus area. I think the OpCos were even though macro headwinds against the entire group, OpCos were actually focusing on how do they drive outstanding performance on an underlying basis. So I think we did not give up and got [indiscernible] back in terms of the impact of macro. I think our investments continued in the line to ensure that the quality of customer experience or the quality of network is not compromised. I think good news is most of the OpCos are actually way ahead of competition when it comes to the experience which we provide to the consumers even on these difficult times here. M&A track, I think we had very clearly laid out part of the structural changes, which I said in the earlier slide on consolidation as well as the value nation. I think that has led to a few transactions this year, which I'll touch upon, which becomes extremely important. How do we get the results, the returns coming out of those investments. So I think that's something which has been a focus. Because of all these M&A, we have challenges on our balance sheet for sure. And I think the focus has been how do we start deleveraging one of the -- I think some of you actually mentioned what are you going to do with the money you received out of the merger completion as well as a shareholder loan come in, is obviously one of the ways to deleverage going forward for us. And I think convergence opportunity, which Dian will talk about as we go along in the agenda #7, how do we leverage that convergence opportunity because we believe with a strong business on XL as well as strong fiber position on the Link net side should allow us to move ahead with the convergence opportunity. Going forward, '23, '25, it's lot about delayering Telco assets. I think Hans will talk about that but mainly seeing that how to get the right realization of values coming from different portfolio within the operations itself. And we've done that in the past with EDOTCO being carved out, we've done that with digital business has been carved out, and we are seeing that value from these businesses, which were kind of hidden within the Telco frame. So I think that's something which we will do. I think Hans will talk about the journey towards TECO, how do we move from being a pure Telco operator to more technology or TECO Enterprise business, I think we've always talked about 20% of our revenue should come from enterprise. I think that remains a focus area, a priority for us, and that will be not just the organic, but we'll also look at inorganic opportunities there. They may not be very large in organic opportunities, but they act as a bolt-on to the existing enterprise business. And the last bit is value elimination coming out of our tower business and digital business as well. And how do we see beyond that in terms of maximizing shareholder outcome? I think we see long-term Telcos will become essentially yield assets. Once the 5G cycle is done, I think the 5G cycle would be a challenging one. But long term, we think Telcos will not have -- or mobile operations, I would put not Telcos because we are looking at some of the other assets being delayed. But if you look at mobile operations, we think there will be essentially yield assets, which has happened mostly in the matured markets. Same thing will happen in some of the other markets. Similarly, infra business, eventually, once we've seen that growth path coming to stabilization with cash flows, which are more predictable on the infra business will become yield asset for us. We will continue to have assets within our framework, which will be continuing to be growth assets. And how do we move away from just being telco with probably 18%, 19% of our business coming from Towers digital portfolio and still predominantly telecom operations to probably looking at a mix of maybe 60%, 65% from that and rest of the portfolio coming from other opportunities, which we will be pursuing here. So that's pretty much how we see the future of Axiata and how we will be delivering on the maximization of the opportunity for our shareholders. So I think -- I mean, I think we did touch upon this slide during our quarter form. So I think so far this year has been good for us. I think we are likely to exceed on our APIs, which we had set for ourselves. I think we -- at the beginning of the year, we looked at some of the transactions on the M&A track with very clear rationale behind why we want to do these transactions, what were the opportunities behind that. I think with Boost having a very strong position on the payment side, on a digital wallet, which we have presence with more than 9 million customers, more than 0.5 million merchants there, we think that's time for us to leverage on the credit business already, which Sheyantha will touch upon how we've been growing the credit business, and we think with the banking license, with a strong partnership with RHB, we should be able to leverage that going forward, should, on a longer term drive that kind of value, which we think we are at this point in time, not credited with them. I think Link Net, XL, I think once the merger happened with Indosat and Hutch, I think we had to find a sweet spot for ourselves to focus on, and that's where the old convergence discussions came in place and our attempt to get the Link Net on our portfolio, having crystallized during the year. So I think we finished that exercise in September with all the MTO getting completed. I think EDOTCO, clearly, with the desire focus towards becoming the top 5 or top 6 Tower companies and moving away from high dependency on the frontier markets to more emerging markets, clearly demonstrates our focus towards Philippines, acquisition of PLDT towers as well as the acquisition of Towers in Indonesia and Malaysia. Having said that, I think the business, which Adlan will talk about continues to grow strong on its organic existing platform. And the last, but not the least, is the merger between Celcom and DG. Something, which we did crystallize more than 2 years back as a reason for us to become the largest telecom company within Malaysia and driving this whole process and with the blessing of the regulator as well as the shareholders, we were able to complete that on 30th of November. And this is really around future-proofing the opportunities in Malaysia because we've seen last 3 years, the mobile industry has been flattened other than the cash flows, there was very little growth to be seen. I think with this consolidation happening as well as synergies which we see and the opportunities to expand beyond just the telecom operations in Malaysia, this should become a very strong business or asset we will have ownership of. So that's pretty much what I wanted to cover, and I'll hand over to Dr. Hans to talk about the future.

Thanks very much, Vivek. I'll share a few thoughts, which follows from the second lever if I just flip back to this slide here, the second lever on the chart here, which takes us from 2023 to 2025, the next 3 years and what the group will be busy with in terms of structural transformation. What I'll talk about really is directional, should not be taken as a forward-looking statement, but more from the point of view of a statement of purpose, a statement of belief, which is increasingly, a shared not only between Axiata Group, as in Vivek and myself, the team at Axiata and all our OpCo and OpCo management, but also a growing belief across the telco industry that something needs to be done to unlock value of Telcos. Because if you look inside the telco and indeed, inside Axiata, we see a great potential for a transformation agenda, which needs to focus on curing the handicaps that we perceive but also to build and capitalize exploit the strength. Clearly, the telecom multiple today does not translate Axiata's portfolio strength. As Vivek went through some of our key assets and something that would strike you is the diversity of these assets, ranging from infrastructure on one hand, to a very rich ServCo, digital telco portfolio and all the way to very advanced digital services. But the value that's been created, the growth that is being delivered does not translate into shareholder value, less so into capital depreciation. So we do share the growing belief and the growing thesis about delayering and also specifically the fundamentals are delayering, which, as we know, delayering is not specifically a telco topic. It could apply to any industry, which is going through a quantum change due to the evolution of technology. So if you were to take the financial services sector or the airlines or pretty much any business, logistics, for example. There is always the opportunity of delayering into parts. Now why is that important? It provides management focus, it provides clarity and it provides -- what takes away the opaqueness of consolidated businesses with respect to how investors could understand how the components and individual plants operate and create value. This would, of course, signal that once you adopt a delayering approach that you should also be prepared to shift capital in line with the growth needs and in line with the appreciation investors have for those specific layers or components of your business. Now why do we think this is something we can succeed in. Axiata has indeed been a pioneer in delayering. Delayering was not a word that was present in 2013 or 2014. It's a kind of new buzzword. But in fact, what Axiata set out to do with the carve-out and growth of EDOTCO with the birthing of the digital businesses way back in 2014 is exactly what delayering is preaching today. So what is really needed is we believe, a sharpening of our strategy, which we are well versed with. We are experiencing this, a sharpening as well as a determined acceleration to do more things faster and to create this model, which provides the required value creation opportunities. Delayering, of course, promises value elimination in terms of margin -- in terms of multiple expansion. You take, for example, the FiberCos today from a 16 to 25x; NetCos, 24x and PlatformCos similar and 17x for Enterprise Solutions. So [indiscernible] from the consolidated multiple that telcos get today of anywhere between 4 to 6x. However, I must caution that and something that we are certainly very cautious about and very cognizant of is that real value will not be created by purely doing financial engineer. Real value would come from actually driving the fundamental of the delayering thesis, which is increasing utilization, improving capital efficiency and driving KPIs such as multi-tenancy and utilization of infrastructure. And that would deliver the value that we seek to achieve. Now an accompanying thesis or buzzword whichever way you look at it, to delayering is this concept of the TechCo, and journey from being a telco to a TechCo. In my view, it's not a transition. It's not that telcos can end up as TechCos per se. Rather, what is important is that the telco journeys using the multiple layers of its business, evolves throughout the continuum of being a telco or pure telco all the way to being a TechCo. So these layers we talk about. Clearly, at the bottom of the stack, you get the infra layers. And here, we could talk about TowerCos, FiberCos and data centers. Now whether we layer the business in combination of these or one or more of them is up to the DNA and also the structural fundamentals of the particular telco. The ServCo is what we see today serving customers. And above the ServCo an important layer is the API -- API layer, which disaggregates the lower layers of the infrastructure from the upper levels of the TechCo. Now Axiata is, in particular, very strong on this area of API application as it's now known as in providing a multitude of APIs, which open up the lower layers of the telco stack for innovation, for digital transformation, for participation by parties beyond the telco. And here, you would move into the horizontal platform layer where platform services could be provided by exploiting the APIs generated from the lower levels of the business. And also these APIs enable telcos to have [indiscernible] friction-free partnering with the hyperscalers. So at the platform layer, you have your own platforms as well as you would make the most of what hyperscalers have to. But for both these -- what is essential is that the API layers and the flexibility and friction-free connectivity to all aspects of the lower levels of the telco are made available. Vivek mentioned the enterprise business and enterprise solutions becoming a very important component of the upper layer of the stack at towards the TechCo end of this journey. And end-to-end solutions as well as vertical solutions for enterprises, again, potentially in partnership with hyperscalers is where we see multiples of 14 to 17x being given to a very high growth area. Now I would also draw your attention to the right-hand side of this chart. Now the left-hand side is the typical telco to Techco evolution, a journey you can have presence in one or more layers. But broadly, you need to evolve your focus of shift capital from the bottom towards the top. Now on the right-hand side, we project some of the challenges, should I say, or task ahead for the management of telco. As in realization that the same journey would also mean that while we are very accustomed to selling technology today, we would need to move into the arena of selling solutions. Likewise, comfort levels of dealing with hardware and hardware-based business and hardware-based infrastructure moving into software-based infrastructure. And very importantly, an asset-centric or CapEx-heavy architype towards a talent-centric of OpEx-driven architect. So these are some of the fundamental changes that we foresee in the next 3 years. Now if I've to very quickly, map, I'm not going to spend time on this, but if we were to very quickly map Axiata's existing assets onto this template, you will see that we have a very comprehensive coverage of presence across this time. Importantly, EDOTCO plays a very robust and key role, one of the early movers in the delayering story. And higher up, we see the ServCos across our group at various degrees of vertical integration. Some are moving very rapidly towards being service scores only reaching out to their own or third-party infrastructure is, while others are more vertically integrated. As I mentioned earlier, we have a powerful asset in terms of our DTE or digital telco enabler, which is developed by our Axiata digital labs and maintain and evolved by ADL and also the AXP, which is a cross-connect gateway, which connects our telco networks at various layers to third-party content providers, third-party OTTs and so on. In the platform layer, again, the DTE asset becomes very monetizable. In that it can be a platform as a service going forward, and also our B2B marketplace and API marketplace, which is already mature in most of our emerging markets and frontier markets today. On the vertical solutions side, we have 2 mature businesses in ADA and Boost. And the telco enabler would also going forward, become a vertical solution to telcos as ADL reaches out to telco groups beyond Axiata. So this is a quick snapshot of Axiata's presence on this canvas, on a canvas of delayering as well as a canvas, which shows the evolution from telco to TechCo. So what gives us a license to win and what makes us hopeful and confident that we should invest the next 3 years in this transformation journey. Several solid proof points. Let's start with ADA. It's a fastest-growing martech and digital analytics and marketing company in Asia. The strong investor validation from seasoned digital investors. Likewise, Boost, which acquired its digital bank license recently and also has investor validation. The star here, of course, is EDOTCO, which -- I mean it's a story that we all know with strong investor validation of USD 700 million in its 2017 private placement. Looking forward to the techco evolution, ADL and the DTE platform already recognized by the TM forum and as the driver within Axiata's techco stack, which places Axiata among the 3 -- the first 3 telco groups globally to have a full implementation of the open digital architecture, the other 2 being Jio and Vodafone -- Vodafone Group. So Axiata is in very [ august ] company with respect to its digital journey. So we -- overall, I'm just flashing this to give ourselves confidence that, yes, we can move down this track and also do it with stealth, but with a very high chance of success. Working with ecosystems, over 70,000 developers today engaged on our API platforms, third-party developers. And in ADL, we have 1,300-plus developers in a take back control formulation, where we not only develop the techco stacks but also bring back control with respect to our telco stacks. So these are moves that were less evident, less publicized, but you would note that it's some of the leading telco groups in the world like Vodafone and Jio, who had similar strategies and continue to work along these lines. So there's financial as well as strategic personal. I won't spend too much time here. I mentioned earlier the multiple expansion that can be achieved in the sum of the parts. But very important to remind ourselves that at the end of the day, this is about clarity, focus, having the right people focused on the right business, you are then able to attract the right talent. You are able to provide clarity to investors, and you can utilize your infrastructures and capabilities at a high level of efficiency. So that's both the financial rationale as well as a strategic rationale. Last but not least, a quick mention that the outcome projected here it's certainly not numbers casting stones since there are no numbers here on this slide, that there would be a shift of our underlying PATAMI contribution. In line with this model from telco through infra to the tech businesses. And this would also be true of the shift from frontier markets to emerging markets with the more mature markets in Asia. And the same goes for the equity value broken down by business as well as reach. So the thesis here is that while some of our near-term initiatives, which we went through the M&As, the consolidations and some rearrangement of our investments would put some pressure on UPATAMI overall, we believe that embarking on the structural transformation journey, delivering results on a very regular basis in terms of execution, extracting the efficiencies that this journey would promise would enable value elimination of the new growth areas while commanding premium valuation multiples and thereby driving the OTP of Axiata. So I hope I gave you a summary of our thinking, I believe, and what we intend to focus on in the next few years, building on the strong foundation of organic growth and delivery, which Vivek shared with us a little while ago. Thank you.