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, and welcome to Axiata's Fourth Quarter 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 companies. There will be a short presentation followed by a Q&A session. [Operator Instructions] Also note that we will end the call promptly at 5:30 p.m. So without further ado, hand over the call to Vivek, please.

Thank you, Clare. A very good afternoon to all of you. It's our pleasure to give the results of quarter 4 2022, to all of you. Let me start with the executive summit. So briefly, I'll talk about the group per se, and then we will jump on to the individual operating companies, which Hans will start, and then I will take on the non-telco businesses at the end. Before I get into details around the performance, if you look at the Bursa announcement as well as the financial results, you would get a little bit confused because we report on the continuing businesses at the face of the P&L and discontinued businesses are just shown as one line. So for ease of looking at the combined results, we suggest you have a look at Part B, Note 13 of the Q4 unaudited financial results in the Bursa announcement. Having said that, these results, which we are going to be talking about today, are on a combined basis because Celcom was part of Axiata for a period of 11 months, so the results include Celcom's performance for the period of that 11 months. Reported numbers had a good outcome coming from the profits from the disposal of Celcom, which resulted in a MYR 13.5 billion one-off gain. Having said that, the performance on the revenue stayed strong for the group at 6.3% and EBITDA growth of 9% and EBITDA margin of 45.2%. The profits, which we've declared is MYR 9.8 billion, out of which MYR 13.5 billion came from the disposal of Celcom. Having said that, we had fuel impact. The larger one offsetting that was the impairment of Ncell, XL and a small amount for Dialog. And these impairments are consequent to the environment where the discount factor, the cost of capital has moved up on these assets and also some of the market structure issues, where we believe the long-term growth may not be as perceived in the past, specifically in the markets like Ncell. Underlying performance, which is basically on the constant currency basis, was extremely strong with the EBITDA improved across all of those, with challenge in Dialog mainly coming out of the overall macro environment before, the exchange dollar strengthening against LKR as well as the inflation factors and continuing performance or not good performance coming from Ncell, which was the ones which pulled the performance down. However, overall, the revenue ex device grew by 10.3% and EBITDA grew by 11.4% with an EBITDA margin of 45.2%, which is around 1% plus ahead of last year's EBITDA margin. This resulted in an underlying PATAMI of 20 -- growth of 20.8%. And the underlying profit numbers of around 1.6 billion reported for the year are, after 7 years, the highest. Not only performance from a profit standpoint, but the company also delivered a very strong cash generation of adjusted OFCF, adjusted is after taking out the right-of-use impact on the assets generated MYR 1.2 billion and gross debt-to-EBITDA of 2.9x. The OFCF came from a strong EBITDA performance as well as lower CapEx intensity, and intensely compared to last year, dropped by around 4.1% to 23.8%. And if I exclude e.Co, which we think is not a fair comparison to group because a lot of e.Co CapEx comes from the new build-to-suit towers, which comes along with the contracts for future cash flows. If I exclude that, the CapEx intensity was 25% -- 22.5%. And this was -- basically came from the operational expense and lower CapEx coming from Celcom, XL, Robi and e.Co. Gross debt to EBITDA of 2.9x and the cash balance at the end of the year was around MYR 7.5 billion. I'll now hand over to Hans to just -- or maybe we come back to the telco, the operating companies at the end.

Yes. We can come back. Yes.

So I'll just jump on to the actual charts on the performance for the year. If I go to Slide #6, which really splits between combined results as well as the continuing operations. Combined results, you can see a 6.3% growth in revenue, 9% growth in EBITDA and also year-on-year, strong growth of 2.7%. And EBIT, lower here, are coming because of our MYR 4.1 billion impairment as well as -- mainly coming from the MYR 4.1 billion impairment. And PATAMI looks strong at MYR 9.8 billion. As I said earlier, MYR 13.5 billion coming from the gains from disposal of Celcom. Continuing operations, these are basically forward-looking numbers from your perspective, which excludes the Celcom Digi. This is basically what we're using for our future guidance to the market. So continuing operations, 9.3% growth year-on-year on revenue, 8.7% growth on the year-to-date basis, a strong EBITDA growth on continuing business of 9.8%, 7.8% on a year-to-date basis growth. EBIT, strong growth overall, if I adjust for the impairment, which I talked about earlier on, which shows MYR 2.5 billion EBIT against the MYR 2.2 billion EBIT in the previous year. The underlying results, which as I said earlier, is on constant currency and excluding the one-off, which is a gain coming from Celcom as well as the goodwill impairment and some of the impacts coming from the ForEx unrealized as well as realized, but mostly on account of the balance sheet alone, which is there. So if I -- maybe -- I think we -- I covered the reported earlier, but maybe I'll just jump on to the underlying, which is the next slide. Underlying results, 10.3% growth in revenue, 11.4% in EBITDA and a very strong profit growth of 20.8%. Growth essentially came from Celcom, though it looks negative 3.9%, because that's essentially considering only 11 months of revenue. But e.Co, Dialog, Link Net will be -- all delivered a very strong performance for the year on the top line basis. EBITDA came from Celcom. Ncell did an extremely good EBITDA development. e.Co, great performance; Robi, I think, again, a 16.6% growth on a year-to-date basis on EBITDA line, and even the quarter-on-quarter EBITDA performance of plus 5.3% has been extremely stronger. EBIT, if I exclude for the impact, which is on account of the impairment on goodwill impairment, then EBIT is grown on a year-to-date basis by 21 -- 20.1%. Underlying PATAMI, as I said earlier, coming across from -- mainly from strong EBITDA growth and also a very strong EBIT development across all those [ centers ]. This is just a bridge to explain how the underlying PATAMI from '21 to '22 gets reflected, impact came broadly by a higher EBITDA of around MYR 1.4 billion, but offset by increased depreciation coming from both the leases as well as the normal debt position on plant machinery as well as increased finance costs. I think we've seen that impact across markets with the interest rates going up and also a higher leverage, which we had to take for some of the new acquisitions which we made last year. Our tax impact of MYR 127 million, mostly on account of the Cukai Makmur the prosperity tax, which was leaving this year in Malaysia, and others is basically minority interest, associates, et cetera. If I look at reported, was underlying, as I explained earlier. A large part of that impact comes from the gain from Celcom disposal, offset by the goodwill impairment of MYR 4.1 billion and a ForEx impact of around MYR 770 million. Adjusted OFCF, which is basically cash flow. So if you look at the adjusted MYR 178 million in 2021. It's moved up to MYR 1.2 billion. So as I said earlier, our strong cash generation for the year across opcos. Dialog, obviously impacted by the impact of ForEx during the year. And Link Net, essentially coming all of the fact that we've accelerated some of the investments in Link Net during the year, which has resulted in negative cash coming out. So on an adjusted basis, as I said earlier, MYR 178 million moves up to MYR 1.2 billion. Balance sheet, overall, in the context of the year remains fairly strong at 2.9, where around 56% -- or 40% of our dollar debt is hedged. Some of it is not hedged because, either it's too long, 30 years bond, or it's too short, which would be paid on over the coming quarters. And local currency at 44%, fixed debt is around -- fixed interest rate is around 64% of our debt and floating 36% and the large part of the debt here looks short term, but that's going to be kind of -- given the process being carried out on some of the opcos, it would be converted in the long term then. As I said earlier, fairly strong cash position. A large part of the cash sits with the Corporate Center, which is MYR 2.3 billion. XL, which is around 1.4% largely on account of the guidance issue, which -- where they collected, which will be used for some -- paring down on some of the debt and also e.Co. So I'll now hand over to Hans to cover telecom operations.

Thanks, Vivek. Good afternoon, everyone. Start with Celcom, Celcom, right from the front in 2022, sterling performance, clearly with the cost excellence, which resulted in double-digit EBITDA as well as PATAMI growth. As Vivek mentioned earlier, the results are not directly comparable due to the ongoing versus last activity reporting. In terms of EBITDA, Celcom grew 9.2% with a margin expansion of [ 9.7% ] to 48.5%. This was contributed mainly by operational excellence initiatives, though as lower sales and marketing costs as well as improved debt recovery and reversal of some of the regulatory charges. EBIT grew 63.3% with a margin expansion of 12 points, ending at 29.4% EBIT margin, resulting mainly from the higher EBITDA flow-through and also the accelerated depreciation benefit where there's an absence of the 3G accelerated depreciation in the year being reported. PATAMI recorded at MYR 1.4 billion with an increase of 43.2%. Cash flows, likewise, resulting from higher EBITDA flow to lower CapEx. CapEx being constrained to MYR 700 million, which is a reduction of 31.5% year-on-year. Moving on to XL. The competitive environment in Indonesia has been substantially rationalized. We see a moderate price hardening in the market. And this, in addition to XL's organic efforts in market capture has resulted in a 9% growth in revenue and also an increase in ARPU from IDR 36,000 to IDR 39,000. XL did extremely well in -- with respect to small business and convergence, and we're happy to report that 37% of XL home subscribers also do play XL up to subscribers. EBITDA grew 7.1%, with margins being flat to around 48.8%. However, EBITDA lagged revenue growth with as moderate margin compression being due to higher OpEx and direct cost. EBIT grew 9.8% with flattish EBIT margins resulting from the higher EBITDA flowthrough. And notwithstanding the higher EBIT PATAMI, contracted by 13.9%, largely due to higher finance costs and also lower one-off gains in the previous year. Cash flows grew 53.7% resulting from higher EBITDA flow to lower CapEx of around 10% in the previous years. Robi had an extremely good year in 2022. Revenues grew 6.1%. All segments performed well and growth seen in voice, data as well as value-added services. Robi's EBITDA growth outstripped revenue growth at 16.5% and the EBITDA margin expanded by 4.3 points to 44.9%. EBITDA has grew mainly due to high revenue flow-through as well as lower direct costs, mainly cost excellence initiatives as well as operational excellence initiatives resulted in this growth in profitability. Similarly, at EBIT, 47.3% growth resulting from higher media blow-through and also partially offset by higher D&A during the year. PATAMI has grown at 1.3%, resulting from higher EBIT flow through and lower tax expense. However, it was very much offset by the ForEx loss on probably its U.S. dollar loans and also higher net finance. Interestingly, if PATAMI were to be corrected for the ForEx loss, the adjusted PATAMI will see -- would demonstrate a growth of 51.2%, which reflects a very strong performance, while on being organic terms at the level of profitability. Cash flows grew 63.3% resulting from the high EBITDA flow-through as well as lower CapEx. CapEx, we're contracting by close to 20% year-on-year. Dialog, operating in a very harsh environment in terms of macro, stabilized its performance, and revenues grew 26.1%, mainly driven by higher revenue contribution from international business as well as enterprise business. Mobile data also grew significantly year-on-year. Following from revenue growth, however, the impacts of inflation, largely driven by ForEx, denominated OpEx and ForEx-related OpEx. EBITDA contracted by 12.2% and margins contracted by 12.4 points. Higher staff cost network costs, network [ rate increasing ], our annual maintenance charges in particular as well as electricity costs driven by the multiple increases in tariff following the macroeconomic crisis during the [ count ]. EBIT similarly declined by 90.6% with a 14.8 points contraction in terms of margin. The lower EBIT flow-through confounded with ForEx losses started in PATAMI, declining by 100% year-on-year, likewise for cash flows declining more than 100%. However, we see the environment in Sri Lanka stabilizing from a macro perspective. We see Dialog's organic performance in the last quarter also picking up very significantly. So provided foreign exchange remains stable, we are confident for a much better outlook going forward. Moving on to Ncell. As Vivek also pointed out earlier, we are challenged in terms of operational performance at this opco with revenues declining by 4%. Core voice revenues declined by 11% and ILD by 8.1%. However, data revenues grew by 10% year-on-year. Similarly, EBITDA has contracted by 12.6% and EBIT by 25.2%. Cash flows declined by 13%, resulting from the lower EBITDA flow-through. And -- however, CapEx was also contained to a negative 10.6% -- 11.6% year-on-year, which help the cash flows to remain within the 10% to 15% range year-on-year. Smart, very strong performance as always, a revenue increase of 6.9%, driven mainly by data revenues and also a one-off revenue from expired scratch cards, but even correcting for this one-off, the revenue growth has been extremely healthy year-on-year. At EBITDA level, we had growth around 1%, resulting from the revenue flow through. In fact, we have written down some of the regulatory costs rising from microwave fees and penalties for retrospective -- on a retrospective basis for prior years. However, correcting for this, EBITDA also would be high single-digit growth. EBIT grew by 5.1%, resulting from EBITDA flow-through and also contained performance on the CapEx. Cash flows grew by 10.1%, resulting from the high beta flow-through as well as the offset , the lower CapEx, as I mentioned, by around 25% reduction year-over-year. Link Net at the opco, which we consolidated since the second half, had -- has a -- it's a bit transformation year in that we are concentrating now on consolidating the network performance, replacing and overbuilding the HFC network fiber and also pressing to face increased competition in the market from increased activity from ISPs in the Indonesian fixed broadband. That said, Link Net Group, it's homes passed by 288,000 home passes to MYR 3.1 million, consolidating its position as the #2 fixed broadband player in the country. EBITDA has contracted by 16% due to lower revenue flowthrough and compounded by higher staff costs and bad debt. Likewise, EBIT and EBIT margin contracted to -- by 16 points year-on-year. Cash flow is significantly reduced by more than 100%, resulting from the lower [ cash ] flowthrough and higher CapEx, as I mentioned, for the upgrading of the network as well as the acceleration of fiber rollout in the base of competition and the great opportunity that is presented by division market fixed [ convergences ]. I'll pass on to Vivek to take the non-telco progressions.

Thanks, Hans. Let me start with Boost first, which is our digital wallet credit business in Malaysia as well as Indonesia. The business did well in terms of top-line growth with 87.5%, mostly coming from the wallet business, which is Boost Life as well as the credit business. Our credit loan book at this point in time stands at around close to MYR 200 million. EBIT consequently improved by around 18.4%, but it's still not out of woods. We still have losses being incurred in this business, which is being planned to be brought down over this year, 2023. GTV grew by 21.2% to around MYR 6.1 billion, and we had improvement in the Boost Life users as well as merchants during the year. The EBITDA as well as EBIT improvement over the last year came around because of the OpEx control as well as improvement in revenue. However, PATAMI doesn't look so attractive, for the reason last year, we had onetime grant, which had come from MDEC of around MYR 27 million, so that is where the impact comes. ADA had a very good performance during the year. This is basically the analytics and data advertising business with a profit jumped to MYR 80 million for the year, and this is the fourth consecutive year of profit coming in. The profit came from essentially the customer engagement, which has been the SMS A2P business and also e-commerce solutions or e-commerce enablement, which is coming from the acquisition we made last year in 2021, Awake Asia, which has been delivering good performance. However, our digital marketing business has seen a spend reduction by our clients, mainly because of the macro environment, overall advertising spend did come down, and that has a consequential impact over -- on the performance of this vertical [ in 2023 ]. However, that's been offset by strict control over staff costs and also taking our better -- from a better extraction of rates, and that's what has resulted in around 49% improvement in profits during the year. e.Co, I think, was a very exciting year for the tower business. The performance was coupled by both inorganic as well as organic improvement. Inorganic, as you know, we did acquire towers in Philippines, where around 2,200 towers have already been transferred and the balance should be transferred during this year, as well as the acquisition of around 1,000 towers in Indonesia. And that basically allowed us to pivot away from dependency on the frontier markets. Having said that, the Bangladesh, Malaysia market, which has been the largest contributor of performance, continue to do very well. We got colo improvement across these footprint for substantial impact. And that's basically resulted in revenue growth of 25.4% and EBIT improvement of 22.4%. However, profit got impacted because of the ForEx impact in some of the markets where the currency did devalue against the dollar as well as net -- high net finance costs, which came off all of the new debt as well as increased interest rates during the year and one-off regulatory fees in one of the markets. So that's basically e.Co performance, but good organic development on colo ratio. We are very happy to inform our investors, a second dividend of MYR 0.05 being announced by the Board -- have been approved by the Board yesterday. That takes the full year dividend to MYR 0.14, which includes MYR 0.4 special dividend, which we declared back in December after the completion of merger between Digi and Celcom. I think one of the explanations on impairment, as you've seen, MYR 4.1 billion, is what we took an impact on our goodwill impairment, mainly coming from 2 markets, Ncell and XL. Ncell has been 2.6 billion, which basically impaired the full goodwill, acquisition goodwill of this asset, mainly coming from the fact that there is an increase in the cost of capital with a much higher market risk premiums as well as increase in the interest rates, and that basically discount factor. As well as we do see market structure in the Nepal, conducive for future growth potential, so the terminal growth assumptions in the value in use has also been resulted in the impairment of around MYR 2.6 billion in Nepal Ncell. And XL is essentially coming from the investments, upfront investments and a long payback from these investments in the form of cash flow, which has resulted in around MYR 1.5 billion impairment of XL goodwill and a small amount of MYR 55 million in Dialog essentially coming out of the current macro situation, resulting in much higher cost of capital in the assumptions for goodwill calculation. So that's the MYR 4.1 billion impairment, which we've taken during the year. Our actual results compared to what was the guidance of the headline KPI as we have given at the beginning of the year, sort of mid-single-digit revenue growth and high single-digit EBIT growth. If I adjust for the impairment on the EBIT line improved by around 10.3% on revenue versus mid-single digit and 20.1% on EBIT compared to the high single digit, which we had guided. In addition to that, the year, even though showed much better growth than what we had targeted or set up, KPI was delivered with around MYR 500 million lower CapEx coming during the year. And that's essentially, as I explained earlier, coming out of operational excellence as well as a bit of procurement outcome with our vendors. Moving forward, I think we stay around with the similar guidance, but given guidance here is, as I said earlier, related to the continuing business, so this does not factor in the impact coming in from the Digi Celcom, in our guidance. So that's basically mid-single-digit revenue growth, high single-digit EBIT growth. Mid-single digit, essentially, I think we think all opcos will continue to perform in line with their performance during this year. But we still believe there are headwinds, specifically in the frontier market where the impact on the GDP growth as well as the affordability for our consumers is going to have some kind of a pressure on the growth. However, given that continues to focus on operational excellence, we think EBIT development would be stronger than the revenue growth. CapEx remains at the same level as last year, MYR 7.1 billion. Most of the CapEx would go into Indonesia for both fixed broadband as well as the mobile operations and also the tower business where we -- as you know, we will be acquiring new towers as well as new orders coming in, in some of our existing markets. So that's pretty much what we wanted to cover from a KPI guidance standpoint. Risks and opportunity. I think -- I mean, I won't do much on this because we still see macro headwinds. We still see -- in fact, this year seems more uncertain than was last year. Last year, as the fed was increasing rates, it was very clear, one direction and the fact that the rest of the currencies or the economic condition wasn't very good. We saw that impact of depreciation, but it was in a single direction. However, this year has started with much more volatility around the currency. And that's where, I think, managing this kind of volatile exchange environment would be one of the risks or challenges for us to deal with. And we do expect interest rates to continue to increase, and also the lagging effect of the increases which have happened earlier in terms of the performance of the company is a risk, which we will have to closely watch as we go. We are also seeing much higher regulatory intervention in most of the markets, specifically with respect to the quality of service requirement. I think all countries' regulators have been wanting telcos to deliver a minimum quality of experience in terms of speed. And also, we do see some markets having higher taxes coming in because of the overall economic situation on these -- in these markets. I think changing industry landscape, again, would be a risk. The impact of consolidation from the markets is both positive as well as negative to deal with. Our balance sheet, as you know, you've seen, is relatively stretched and had stretched for very good reasons of investing in the future opportunities. Having said that, the stretched balance sheet will have some challenges on future strategic investments. We will have to balance well between the balance sheet per se as well as the opportunities which come in front of us. So I think that's something which we will be looking at from our risk management standpoint. Opportunities, I think we have seen some of the markets getting a bit more rational in terms of the price, I think, enhanced, covered some of those. We expect that to continue going forward in 2023. I think we haven't factored in the strategic benefit so far. We haven't got the benefit into the book so far between the XL and Link Net synergies, I think we should -- which we are working on. We should start seeing those benefits flowing in and also looking at opportunities of monetization of some of the assets, which some of those activities are currently underway or in preparation. So I think that's pretty much what we wanted to cover tonight so I'll -- Clare, open up for Q&A.

Okay. Thank you, Vivek. Thank you, Dr. Hans.

So we'll move on to the Q&A session. [Operator Instructions] So we do see a question coming through from Ranjan from JPM.

Can you hear me?

Yes.

Yes. Ranjan, we can hear you.

I have 3 questions. Maybe I can take them one by one. The first one is conceptual. I saw the way you present free cash flow. Is that how you look at the free cash flow for the business? Is that how the KPI is for management? Because the way we have been looking at free cash flow is also, we also deduct lease liabilities as well. And then the profile looks different from some of the companies.

So Ranjan, we have pretty much 3 key elements of our KPI for all the opcos as well as group on the profit line. One is the EBIT; second is the normalized profit, as I have said; and third one is the adjusted OFCF, which is excluding the lease liabilities. So that's what we monitor at this point in time, because it -- in our view, that's closer to the actual cash generation and essential for us to monitor because of this whole lease liability of the OFCF definition, which has been used in the past was quite distorting and never correlated well with the actual cash generation.

So you exclude the lease liabilities, but that would incentivize management teams to sell more towers and fiber and convert the OpEx into leases. Because for some of the opcos, if you start adding the lease liabilities, the free cash flow is negative.

No, we don't add, we deduct. That's what I said. It's EBITDA minus the -- minus CapEx, minus the lease liability payments, minus interest and taxes, so we don't have that.

Okay. That makes -- that aligns you further with the investors. The second question I have is, like, which are the dividend-generating assets at Axiata now?

So we have dividend coming well from -- okay, let me put it this way. I think the most of the opcos have capacity to deliver dividend. There can be smaller amounts or higher amount, but all the opcos are self-funded and have the capacity to deliver dividend. The larger dividend for us comes from -- still, from Nepal as well as Smart, which is in Cambodia. The other assets, at this point in time, have a lower level of dividend, but we see them also moving to dividend in the future. The only asset -- just -- the only asset where we do not have dividend coming in is really e.Co, because I think it's still in a growth phase with substantial investments being made. And we do see this as more assets for value drive than essentially dividend at this stage of its development.

Celcom.

Sorry?

Celcom dividends.

So Celcom dividend, I mean, Celcom, if you ask me, we had set up a policy jointly with the -- with Telenor on dividend from Celcom based on all the profits of the year, but based on what should be the threshold of net debt-to-EBITDA at 2.5x. So initially, we will see dividend coming in from Celcom, better than what is the -- what is expected based on the payout ratio of profits for the year, because there is a [ fierce ] headroom which the company has from a leverage standpoint. But I think we would expect that dividend to be more sustainable as we go along.

Got it. The last question is -- so the last -- again, coming back to the dividend question. So the Axiata's group dividend, is it funded completely by the dividends coming from our various assets? Or do you need to take on more leverage for it?

No, no, no. We don't -- I mean, we don't take leverage to fund our dividend. So it's mainly coming from the assets, dividend flow from the assets. In the past, we were constrained by the retained earnings. But now with the big profit which we got from disposal also helps us build and retain earning.