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. Thank you for standing by, and welcome to Axiata's Fourth Quarter 2023 results briefing. Apologies for the slight delay. Today, we have present with us Vivek Sood, Group CEO of Axiata Group; Dr. Hans Wijayasuriya, CEO of Telecom; Nik Rizal Kamil, Group CFO; as well as representatives from our operating companies. There will be a short presentation followed by a Q&A session. So without further ado, I will now hand the conference over to Vivek.

Thank you, Clare. Very good afternoon, good morning, good evening, wherever you are. Welcome to the quarter 4 2023 result presentation. On my right is Dr. Hans, who heads the telecom business as well as he is a BD. And on my left is Nik Rizal, who is the new group CFO, CFO on the Block job, which I did some time back. So welcome, Nik. This is your first presentation for our results.

Thank you.

So let me go through first couple of slides, and then I'll hand over to Nik and then Hans will take over from Nik to go more into details if required. 2023 has been an interesting year where we did pursue some of the strategies which we had put in place. And some of those things are still work in progress, and some of them have been executed well. Having said that, the business actually now looks a little different because of the fact that 2 of the markets we decided to exit. One, as you're aware, Nepal on first December, we sold the operations of Ncell and now we've decided to exit EDOTCO Myanmar, while from an overall Axiata standpoint, it is less than 3% of net assets. However, from EDOTCO perspective, it was substantial contributor. But the reason of exiting these 2 markets has been the uncertainty and deteriorating operating environment in these 2 countries. I mean, as you remember, Nepal we did say that uncertainty and non-favorable environment for foreign investors. Similarly, we do think the current situation would further deteriorate the operating environment in Myanmar. Having said that, we expect us to exit over the next 12 months period. Because of that, we do talk about our results for 2023 into 2 parts. One is the continuing operations, which is excluding Ncell and EDOTCO Myanmar and combined operational reports, which is basically looking at the financial numbers based on how that has been reported to the stock exchange as well as underlying results, which is after adjusting for the noncash impairment coming out of these two assets, which we disposed or are in the process of disposal. So let me start with the continuing operations. I think our businesses have been quite resilient and have been quite strong in their performance in 2023. The revenue growth on continuing businesses was 9.9%, and the EBITDA growth was 11.7%. And other than the digital businesses where our priority focus has been around profitability and also our investments coming into the digital bank in Malaysia. All other businesses, telcos specifically did extremely well. And all the telcos saw increase in market share as well as improvement in monetization to increase or to -- which in a way is reflective of market structure improvement in most of our markets. Having said that, profit was impacted because of higher D&A in the EDOTCO business as well as the investments into Link Net. These are essentially investments early before we can actually start corresponding, seeing corresponding cash flows coming from these investments. And of course, effect of higher finance costs consequent to increase investment in these businesses as well as the increased interest rates in most of the markets. Also, the impact of the fact that in Sri Lanka as well as in Bangladesh, we reduced our dollar debt given the uncertainties, and that resulted in higher interest cost because the local interest -- local debt was with higher interest rates. Combined operations has been impacted largely because of the impairments coming in from disposal of Ncell and disclosure of EDOTCO Myanmar as held to sale. EDOTCO Pakistan has been a small impairment, but that's because of the macro situation in Pakistan at this point in time. But also the effect of the -- while the revenue and EBITDA growth has been good, the effect of lower share of Celcom versus 2022 has been also the factor for lower results versus last year. Underlying performance adjusting for these factors are fairly strong with revenue at 10.3%, but PATAMI impacted because -- mainly because of the lower share of CelcomDigi, way back in December 2022. We had classified this event, associate where our ownership is now 33% versus Celcom earlier was 100% subsidiary of Axiata. On our cash flow, which has been one of the important behaviors for focus for us. We see adjusted operating free cash flow -- adjusted is a measure which we closely monitor, which is basically our OFCF minus there is lease payments, which is positive MYR 1 billion coming out of strong EBITDA growth as well as reduced CapEx intensity across markets. I think we've gone from 26% of revenue, CapEx intensity in 2022 to around 21.6%, which is a substantial improvement on the investments there. Cash balance, I think we did repay around MYR 2.2 billion debt in 2023, which has delivered a saving of MYR 82 million for us. Our balance sheet remains resilient. Having said, there is an impact on the higher gross debt to EBITDA coming because of the consolidation of EDOTCO Myanmar. I'm happy to inform our performance against the Headline KPIs for 2023 were better ahead. If you recall, we had guided the market with mid-single-digit growth in revenue and high single-digit growth in EBIT but we've ended up with around 7.8% growth in revenue ex devices and EBIT growth of 18.4%, which is ahead of the Headline KPI. I'm also happy to announce our second dividend payment of 0.05 sen, which will bring the FY 2023 dividend to 0.10 sen. The cash flows at the group as well as dividend flow coming from our operating companies has supported our ability to pay the dividend -- the second dividend of 0.05 sen. Let me go through individual companies. Let me start with XL. XL, I think seeing a good strong market structure improvement, market repair, which supports a double-digit growth, also the fact that the home business as part of our home fixed, mobile convergence has seen nearly 50% growth year-on-year and that has translated into the improved EBITDA as well as slow down to strong PATAMI development of 14.6% over previous year. I think good news is the market has seen uplift of ARPU. We do expect that to continue going forward in 2024. Robi had an extremely good year with all cylinders; filing -- firing well with the revenues growing at around 16%, EBITDA growth of 19.3% and EBIT growth of 27.9% or 28% coming from growth in subscribers as well as improved ARPU of 12% from BDT 126 to around BDT 142. And this has also been supported by strong structural cost improvement as our operational performance. In addition to that, the business has also been seen as a strong brand position in the market with both Robi and Airtel as well as improved quality of experience for the consumers and also reduced customer -- improved customer satisfaction index. Dialog seen successful maneuvering amidst the prolonged Sri Lankan crisis. I think the market is relatively stable now with the currency has been relatively stable as well as the inflation is coming down and interest rates lowering. Having said that the base itself has worsened from what it was precrisis. And we've also seen certain cost escalation, specifically in energy costs, which doubled in 2023. But despite that, the business continues to focus on its cost re-scaling initiatives where MYR 19 billion has been taken out from the cost in the year and that's basically led to a strong profit number. And also Dialog has been managing to reduce its exposure on dollar debt by converting some of this into local debt, but that's a downside effect with higher interest costs incurred for them because of local debt being much more expensive than the dollar debt. Smart continues to be a strong performer with strong cash flow generation. Revenue growth of 1.3%, but that's also coming from the fact that last year, we did have a one-off revenue coming from the scratch cards in 2022. But if you normalize for that, it would be around 4% to 5% revenue growth coming in the year. But they're translating in a very strong slowdown to EBIT as well as profit and continues to focus on the cost efficiency measures. In fact, 2023 was the highest profit year for this company and also the highest cash flow year. Link Net, I think we do struggle with multiple things being done at the same point in time and also the market structure a little bit changing from a fixed broadband standpoint. I think long term, we do see a big opportunity here because the penetration levels are still low, but this business has seen a little bit of a downturn coming post pandemic where people are now consolidating their connections. We've also seen a little bit of price erosion in the market. Albeit Link Net has been able to hold on to the ARPUs and in fact, improve. But we've also seen relatively higher churn and also the effect on some of the costs, including the impairment of receivables coming from some of the legacy issues, which this company had. In addition to that, I think the transition from being a pure cellco into a fiber wholesale provider has also been one of the focus areas for this company. But that's one area which remains an important priority for us to fix as we go into 2024. EDOTCO, I think strong contribution coming from both inorganic from Philippines and Indonesia, but also the fact that co-locations improvement in Malaysia and Bangladesh. In Malaysia, carrying the largest recipient of the new colo orders coming from DNB as DNB rolls out the 5G network. And I think as the markets move to the second wholesale provider, EDOTCO should be the beneficiary of that development. EBIT got a little bit impacted because of the higher D&A coming from Philippines and Indonesia. Philippines acquisition was treated as fixed assets. And all that has been now depreciated into the P&L line, and that's going to be a continuing impact when we look at the P&L of the Philippines business here. PATAMI impacted by higher finance costs as well as the impairment of Myanmar, which is, as I said earlier, has been classified and held for sale. Boost, I think focus remains on path to profitability. Having said that, have been seeing marginal revenue growth, which is coming from the merchant discount rate being slightly impacted. But overall, the organic business development has been good, and there has been now investments coming into the start-up of the digibank or the Boost bank in Malaysia. So for last year, MYR 40 million would have been our investments into setting up this particular bank. And the smooth continue to be an area of focus going into 2024. ADA finished strong, continue to remain profitable. Having said that been marginally impacted because of the A2P business where we've seen the trend downwards which is a highly profitable business. And that's true across the globe where we've seen these trends coming down. But the business now kind of pivots more toward the data transformation and data analytics business as we go forward. So that's pretty much the summary of our businesses. So I'll now hand over to Nik, who will talk about the financial results for 2023.

Okay. Thank you, Vivek. Good afternoon. We will start with this slide where I will talk on the continuing operations results. Here, continuing operations is defined to exclude and sell operation in Nepal as an 80% subsidiary of Axiata Group and also EDOTCO Myanmar, which is classified as an asset held for sale. CelcomDIGI Berhad is treated as a 33.1% associate and Link Net active stake of 92.83% from third quarter 2022. On the continuing operations, as alluded to by Vivek, Axiata remains well positioned for the next phase of growth. In FY 2023, revenue and EBITDA grew by 9.9% and 11.7%, respectively. This was contributed by all OpCos and in particular, XL and Robi on the back of market repair from -- driven by higher subscriber growth market capture and also ARPU expansion. There was also inorganic contribution in EDOTCO from Philippines that contributed to the results with also increased co-location in both Bangladesh and Malaysia. On EBIT, that grew by more than 100% to MYR 2.4 billion from the revenue and EBITDA flow-through. EBIT in the previous year was also impacted by impairments at XL and Dialog to the tune of about MYR 1.5 billion. On PATAMI, we reported losses of MYR 125 million on the back of higher net finance costs and also ForEx losses. For the combined report, this essentially assumes Ncell continues to be included as an 80% subsidiary of Axiata Group and also the inclusion of EDOTCO Myanmar. If we go to the next slide. So for reported results, Revenue grew by -- year-to-date revenue, our full year revenue grew 8.2% on the back of strong contribution from XL, Robi, EDOTCO and also consolidation of Link Net for the full year. And as such, EBITDA grew in tandem by about 10% year-on-year. On PATAMI, however, the reported losses was largely impacted by the loss on disposal of Ncell of about MYR 356 million. The impact of the impairment of asset and goodwill for Ncell, EDOTCO Myanmar and EDOTCO Pakistan totaling MYR 2.2 billion and also higher net finance cost of approximately MYR 551 million and a lower share of results of CDB or CelcomDigi Berhad. FY 2022 figures also reported a one-off gain from the disposal of Celcom Group of approximately MYR 13.5 billion. For underlying performance, on a constant currency basis, revenue ex device grew 10.3% to MYR 23.7 billion supported by continued growth from all of course, except for Boost and Ncell. In Boost, this was impacted due to the charging of merchant discount rates in 2023, whereas for Ncell, it was only reported 11 months of contribution following Axiata's exit in December 2023. Underlying EBIT reported a strong 20.9% growth year-on-year, supported by Dialog, reaping the benefits from its cost risk scaling initiatives, which included network optimization, manpower rightsizing and also a change to local vendors, whilst Robi and XL was boosted by cost savings on top of the revenue growth, which I alluded to earlier, primarily from lower sales and marketing and also direct costs. UPATAMI, however, saw a decline of 64.9%, mainly driven by the increase in net finance costs coming from EDOTCO and Link Net primarily and also a smaller contribution from CelcomDigi share of results of about MYR 550 million compared to its PATAMI contribution as a subsidiary in the same period last year of approximately -- of about MYR 1.3 billion. On the next slide, on adjusted operating free cash flow. Adjusted OFCF increased by more than 100% to MYR 1 billion. This was largely supported by higher EBITDA, lower CapEx and taxation, however, offset by the increase in net finance costs, where cost of debt increased by approximately 50 basis points and also higher ROU depreciation. The higher EBITDA was largely contributed by XL, Robi, EDOTCO and Dialog and also full year consolidation of Link Net, whilst the lower CapEx was largely on the back of control or constrained CapEx from EDOTCO, XL and also Dialog. On an OpCo basis, as you can see, both EDOTCO and XL saw increases of more -- of 100% on the back of higher EBITDA and lower CapEx. Dialog also increased by more than 100%, supported by higher EBITDA, lower CapEx and also taxes where it was one-off surcharge tax in prior year. On the balance sheet slide, net debt-to-EBITDA ratio increased from 3.17x in quarter 3, 2023 to 3.36x in quarter 4, 2024. This is mainly due to the reclassification of EDOTCO Myanmar as asset held for sale. The EBITDA of Myanmar accounted for approximately MYR 280 million or approximately 2.6% of the group EBITDA whereas, as you can see from the table above, the EDOTCO debt is at MYR 6,317 million. The cash balance of Axiata HoldCo is lower quarter-on-quarter to MYR 1.6 billion. This is due to the dividend payment and the one-off OpEx which relates to the MSS costs in quarter 4 2023. Positively, there was debt repayment of RM 2.2 billion in FY 2023, which delivered interest savings of MYR 82 million. This is very much in line with Axiata strategy to reduce borrowings and also to reduce HoldCo costs. On the next slide, the Headline KPI, as alluded to by Vivek earlier, against Headline KPIs for FY 2023 results, we are pleased to announce that the group exceeded its target of mid-single-digit revenue ex device growth, where we came in at 7.8%. And we also beat the target of high single-digit EBIT growth with an achievement of 18.4% for FY 2023. Our CapEx was also lower, as I alluded to earlier in the AOFCF slide, where the CapEx spend for 2023 was MYR 5 billion against a target of MYR 7.1 billion. With that, I will hand over to Vivek to take us through the forward guidance.

So in line with our performance and the positive momentum on our existing continuing operations, we would like to guide the market with continued mid-single-digit growth in revenue and mid-teens growth coming in EBIT, which is on the baseline numbers of revenue of MYR 22 billion and the EBIT of MYR 2.4 billion. CapEx has been lowered from the last year guidance to around MYR 6.1 billion and largely coming out of the infra businesses, which is EDOTCO, the Link Net as well as Bangladesh and Indonesia. Okay. That's it. I'll hand over back to Clare for Q&A.

Yes. Okay. Thanks, Vivek and Nik. So we will proceed as usual to the Q&A session. [Operator Instructions] I see that Foong from CIMB has its hands raised. So could you please unmute your mic and proceed with your questions. Thanks. Can you hear us? Foong, can you unmute your line, please? Oh there's a technical issue. Okay, maybe we move on first.

Maybe Foong you can type it on the chat box of -- by the time, I think we take up the other question.

Yes, yes, we can move on. Let's...

Sorry. Yes, finally, I got to unmute my mic. Yes, thank you so much for the call and opportunity to ask some questions. I've got just 4 quick questions. On EDOTCO Myanmar, have we started the sale process approaching potential buyers for this asset? Secondly, for Boost, I see that it has broken even in the fourth quarter of last year. And usually, the losses here is about MYR 30 million to MYR 40 million. So I'm wondering why the improvement? And is this sustainable going forward? As for the losses from the digital bank, right? Also, where will this be accounted for in the P&L? And then my third question on Ncell, if the Nepalese government does not approve the sale, and that causes the buyer to back out. What do we do in that instance? Do we walk away from new operations? Or do we have to continue? And also on Ncell, have we now fully written off the book value and also the currency reserves such that there will be no further impairments there? And finally, on the CapEx, guidance of MYR 6.1 billion, can you just give us a breakdown in terms of the respective OpCos? Those are my questions.

Okay. Foong, I think that was way too many. So let's go one by one. So let's start with the first one.

Yes, so on Myanmar, I think the decision was made to exit for reasons which I said earlier, and we did start the process of finding the buyer for the operations. So the discussions are currently on with the buyer, and we would make necessary announcement as and when we are able to conclude. Having said that, I think the realizable value which is being used for the purpose of impairment is based on the indicated values which we have in place at the moment. What was the second one? So Boost, I think there in Boost business, if you go even earlier years, there are some annual contracts, which are there on basically the fees business which we have with some of the corporate partners. And that typically comes at the end of the year and gets recognized once in a year. For example, we have with MasterCard, right? So that, I think, is onetime blip, which you see in quarter 4 and that you've seen even the previous quarters. So I don't think this is something which is normal. Having said that, I think we do see, going forward, focus on improving profitability. Boost has gone through some restructuring in both Indonesia as well as Malaysia, which reduces the operating cost. They've also been very focused on the marketing spends on building the digitalized business, which is the wallet business. Mostly focus now is to build on services which can feed into the bank. So that, I think, is something which we should see, I think target is by 2025, early '25, we should be breaking even on nonbank business, but there will be still losses coming as we invest into building that digital bank. Now accounting for the digital bank losses. So far, it has been mostly on the Boost Holding side, which is the parent company because that's been supporting the building of the bank. But going forward, now that the bank is up and running, the future cost would be built in the bank. And some of these costs would also be transferred back to the bank once we are able to agree on what needs to be transferred and at that time -- point in time the 60% residual or our ownership of the bank will fall into the P&L of Boost revenue. What's the other question?

Foong, could we trouble you to ask the question #3?

Yes, the question...

Nepal -- sorry, from Nepal, I think it would be clear we disposed of with full indemnities relating to the approval required from the regulators. So there is no liability as such, which flows back to Axiata. So it's been a clean exit from Nepal market. We do not have any exposure as it stands with the Nepal -- with the buyer, because he has provided the full indemnity for us to exit from this market. And we sold off the offshore entity, which was e Reynolds which was the entity owning Ncell with full indemnities in place here. On the currency, on the write-off of book value, I think in this quarter 4, we flushed out everything, including the ForEx reserves, which were there in the books. If you recall, when we did the disposal, we didn't talk about potential flushing off of ForEx reserves. So that's being done. So we don't see anything else on the Ncell account.

Okay. And the last question on the CapEx breakdown. Yes, if you could...

CapEx, that's a favorite answer of Clare. Clare, can you provide?

Yes. Okay. I think CapEx-wise, essentially, we are doing in Indonesia about IDR 7 trillion. Also, let's -- I'll go back on this. We're just getting the numbers. Maybe we'll circle back on this. So yes, let's circle back on this because I think -- okay. I just got the answers. Okay. So I think XL is IDR 8 trillion. So in total, perhaps just to recap for the whole group, we are guiding for MYR 6.1 billion. XL is IDR 8 trillion. For Smart, Dialog to the tune of about MYR 300 million each, Robi is about MYR 800 million, EDOTCO MYR 1 billion. Link Net is about MYR 900 million and the rest would be corporate center as well as the digital business. Okay. I think now we can move on to Luis. Luis, would you unmute your line and raise your questions, please?

I had 3 questions. The first 2 on EDOTCO Myanmar, the last one on Link Net. First question is, I noticed that the EDOTCO impairment amounts to about MYR 489 million in the fourth quarter, but EDOTCO booked a loss of MYR 733 million. What accounted for the difference? The second question related to that is, with this reclassification of Myanmar as a foresale asset. Is that indicative of any progress you're making towards value crystallization for EDOTCO? If I recall, it used to be a hindrance for the IPO in the past. Can you get a sense of the timetable for that exercise? And last question is just to confirm that the Link Net losses we see in the fourth quarter, is there any one-off or accelerated D&A in those numbers or it's a pure operational? And has it plateaued already the losses for this quarter in your view?

Nik, do you want to take the...

Yes, I can take the impairment. So Luis, the losses at EDOTCO level of MYR 733 million in quarter 4 is mainly due to the EDOTCO Myanmar asset impairment of about MYR 777 million and also Pakistan goodwill impairment of MYR 40 million. This comes to a total of about MYR 816 million. So at the Axiata Group level, the PATAMI impact of these impairments is the MYR 489 million that you quoted and MYR 25 million accordingly. So in total, it's actually MYR 514.9 million as Axiata holds 63% of the EDOTCO Group. So if you were to exclude the impairments, EDOTCO in quarter 4 is actually making small operational profits.

So on the second question on -- we have said earlier that EDOTCO would require funding for its growth and as well as for pairing down some of the debt, which it has, and that process is currently underway. And you are right, as part of that process, Myanmar was one of the hindrances. Hopefully, we can complete the process of disposal of Myanmar, then that would become much easier for us to execute on.

Any timetable in line second half of the year, or?

So I think in terms of our process to get new investors, I guess, Myanmar exit is not an easy process. Even if we are able to sign the definitive agreement, the regulatory approval will take time. I mean you've seen with some of the other exits, which have happened that it does take a while for the approval to happen. So I don't expect Myanmar process even if we are able to close with a buyer to complete very soon. Having said that, on the next part of fundraising for EDOTCO is being run on parallel. We do expect something to come out in the next 12 months.

Yes. The last question was on Link Net.

So the last -- the third question on Link Net.

And this is on the -- yes, go ahead.

Yes. No one offs or impairments at Link Net. The escalation in D&A as well as finance charges relates to the transformation to a FibreCo and rollout of passes in advance of revenues flowing through. And of course, also the impacts of the last same customer base during the early part of week. So it's all organic.

Do you think it's plateaued already with the fourth quarter? Or are we going to see some improvements going to this year?

That's right. So churn rates have fallen. We have a stable subscriber base and an uplift in ARPU as well, which is a strong sign for 2024.

Just to add, I think profit, you will still see an impact because of the slowdown from the fiber build, as you know, there's already 1 million fiber home passes being built for XL and then we will start the other 2 million. Once that happens, you will see some increase in D&A and interest costs on Link Net. So the operational side, BAU team stabilizing. You will still see some impact coming off the investment in building the FibreCo.

Okay. Thanks, Luis. I think next up with the hand raised would be Prem from CGS.

Really one question from me. With regards to EDOTCO with the carve-out of Myanmar now there and you're taking off essentially about 15% of your EBITDA as a result, how quickly do we anticipate that EBITDA gap to be filled up? And essentially, are the improvements in Malaysia and Philippines sufficient to give us growth this year in EBITDA for EDOTCO? Or do we think we have a dip before we grow into '25, et cetera?

We have Annis there on the call? Annis, you take that question. Or is it Adlan?