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 First Quarter 2024 Results Briefing. Today, we have present with us Vivek Sood, Group CEO; 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 would like to hand the conference over to Vivek.

Thank you, Clare. Very good afternoon all of you. It's a pleasure to present the quarter 1, 2024 performance to the analysts and the shareholders. Quarter 1 was a continuity of a fairly strong operating performance, where we saw double-digit growth in reported revenue, EBITDA and EBIT. Part of the impact on reported was also the fact that the ringgit depreciated faster compared to the other operating companies. Having said that, the performance came strong from all the operating companies as far as the revenue is concerned, except in Link Net. And the strong performance on EBITDA and EBIT across all operating companies. Our main contributors for the performance was XL and Robi, coming out of uplift of ARPU. I think as you've seen, the market repair in these 2 markets have been working in the right direction and also from the fact that EDOTCO has managed the cost as well as growth in the co-locations. The reported revenue was lower by 13%, this is for the continuing business. It was around, I think, MYR 60 million and you look at the discontinued, which is basically Myanmar. Coming out of the higher ForEx losses given that the ringgit depreciated against the U.S. dollar and a lot of our debt in the group is in U.S. dollar and also the higher finance cost. Part of it was also with the intent of converting a lot of U.S. dollar loan, both Bangladesh as well as Sri Lanka, into the local debt to avoid any impact of the ForEx, but the -- as you know, the local debt is always more expensive than U.S. dollars. Well that was the other impact, which came. On an underlying performance, I think a strong -- if you adjust for the ForEx, strong underlying profit development of MYR 142 million uplift in margin to 2.7%, coming out of the [ revenue growth ] of 6.6%, [ EBIT growth of ] 41.3% and 6.6% is basically reflective of the translation impact from operating currencies into ringgit. And the revenue was down in Link Net and Dialog. Dialog was driven because of our intent to reduce lower down the hubbing revenue to a low-margin business. And -- but strong continued EBIT growth of 41.3%, the EBITDA development in all our operating companies. Cash flows, which we would say an adjusted OFCF, which is basically after the ROU [ debt] reposition, we have MYR 400 million, coming out of good EBITDA development, which is of 25.4% and also the CapEx spend, a slower rollout of [ B2S ] and developement of CapEx spend in Dialog and Smart. Net debt to EBITDA, I think that's a strong improvement coming out of strong EBITDA growth, to 3.01% (sic) [ 3.01x ] compared to the last year quarter 4 at 3.35% (sic) [ 3.36x ]. Marginal increase in borrowings, I think Nik will cover in more detail why this borrowings increased, but mostly the improvement coming out of EBITDA and EBITDA growth. We've also paid down some of our debt in the group at the corporate center of USD 100 million. We remain ahead of the headline KPIs, which I have said, but we are cautious the full year numbers, given the challenges on macro environment haven't finished, and we expect us to remain in line with guidance given at the beginning of the year, which is a low single-digit growth, means our growth. If I look at each of the individual companies [indiscernible]. XL, I think double profit, coming a lot around the market repair, ARPU improvement, which is reflective of year-over-year revenue growth, as well as cost excellence efforts being made by the company. And that's basically translating down into development as well as the profit lag. Robi, as I said earlier, continues to show strong, better revenue growth and cost optimization reflective of improvement. But I mean, Dialog in EBITDA margin expense, while the revenue remained subdued because of the EBIT as we pivot away from in business. But the profit is impacted because of the high interest rates, especially because of conversion of U.S. debt into LKR. Smart continues to deliver well. [indiscernible] ARPU, as well as profit is [indiscernible] is less impacted because of ForEx because of the dollar-denominated operations. Link Net, I think stabilizing now. We would see -- we've seen a stabilization on the number of customers, but also improvement in EBITDA coming out of efforts, meaning lowering down costs for direct marketing, manpower and bad debt as this company prepares for becoming a wholesale fiber operator. But the overall profit continues to be impacted because of the higher D&A and net finance cost. This is basically building of fiber home passes for XL to deliver on. So there's always a timing gap between the investment phase of building new fiber home passes are heavily generated from the Axiata home connect. EDOTCO, improved contribution coming from most of the markets and also factor in the revenue growth and also improvement in EBITDA, largely coming out of improvement in co-locations. Some were built too soon, but mostly improvement in the number of co-locations. EBIT kind of impacted mainly because of the net finance costs. Boost, I think, preparing for launch of Boost Bank in Malaysia. Most of the investment is going into the start-up cost for the Boost Bank. We have revenues showing a strong improvement and [Audio Gap] losses coming down. Operational standpoint, developing the ecosystem, it should support the Boost Bank. I think it's still continued development on number of users as well as merchants. ADA, a good turnaround for ADA, specifically on the e-commerce and customer engagement with the SMS A2P business you've seen and also contribution now coming from the new data transformation and AI business, which is resulting in positive development, compared to the last year. I think we've seen strong improvement along the A2P SMS business relative to what it was in 2023 and that's basically reflective of the [indiscernible]. So I'll hand over to Nik to go through the details of the financials.

Okay, sure. Thank you, Vivek. On this slide, on reported results, which is on the continuing businesses, the revenue growth was in double digits at 13.3%, contributed by the strong performance from all OpCos with the exception of Link Net, which was impacted by lower residential and enterprise revenue. EBITDA also posted double-digit growth of 25.4% and EBIT at 49.9%, where the growth was largely contributed by XL and Robi from market repair, from ARPU uplift and also cost optimization. EDOTCO also posted double-digit growth due to higher co-location and lower manpower costs mainly in Bangladesh, Cambodia and Philippines. PATAMI, though, was lower by about MYR 13 million to MYR 34 million as at quarter 1, 2024, which represented a 29.3% contraction on a year-on-year basis, mainly driven by ForEx losses, wherein quarter 1, '24, the loss of MYR 91 million compared to quarter 1, '23, where there was actually a gain of MYR 13 million. Finance costs, net finance cost was also higher, mainly driven by XL, Dialog and EDOTCO. On the next slide, on underlying performance. On a constant currency basis, revenue growth of 6.6% was contributed by all OpCos except for Link Net. So Link Net, as I alluded to earlier, is due to the slow recovery of residential segment and the lower contribution from enterprise. For Dialog, the lower contribution was due to the lower contribution from the low-margin [ hubbing ] business, which was a conscious decision by us to give it away from. EBIT growth of 41.3% was largely contributed by XL and Robi, which posted double-digit growth. XL, the ARPU uplift was 10% year-on-year to close at the record high of IDR 44,000. And there was also cost optimization efforts at XL, which a lowered direct sales and marketing costs from digitalization initiatives. In Robi, it was also assisted by strong subscriber growth. At EDOTCO, as I indicated earlier, double-digit growth with growth driven by -- mainly in Bangladesh, Cambodia and Philippines from higher co-location and lower manpower costs. UPATAMI grew by more than 100% as EBIT growth outpaced increase in net finance costs in XL, EDOTCO and Dialog. Next slide, please. On adjusted operating free cash flow, that grew by more than 100% to just under MYR 400 million at MYR 397 million, supported by the strong EBITDA growth of 25.4% in XL -- mainly contributed by XL, Robi and EDOTCO. Furthermore, EDOTCO had lower CapEx from this lower rollout of build-to-suits in Bangladesh, Indonesia and Cambodia and the phasing of CapEx spend at Dialog and Smart. Next page. On the balance sheet. Net debt to EBITDA improved quarter-on-quarter from 3.36x at the end of quarter 4, 2023 to 3.01x at the end of quarter 1, '24. This was mainly supported by the strong EBITDA growth. Borrowings, though, on an absolute basis increased by 2.8% quarter-on-quarter to MYR 25.5 billion, largely due to the USD appreciation hitting EDOTCO's borrowing and also the holdco USD debt. There were also additional drawdowns from XL, approximately about IDR 1.1 trillion for working capital purposes, Robi by about BDT 3.7 billion, mainly for spectrum purchase. And at Link Net, roughly IDR 556 billion for the home pass rollout. At Axiata company level, there was also a prepayment of USD 100 million in March, which lowered holdco cash balance quarter-on-quarter to MYR 1 billion. One thing to note is that whilst on a Malaysian ringgit basis, quarter-on-quarter, the absolute borrowing grew by about 2.8%, it is worth noting that 2.3% actually relates to ForEx translation. Next, on balance sheet. As said, first quarter 2024, 64% of group borrowings are on a fixed rate basis. mainly from Axiata company debt, EDOTCO, Dialog and XL. 64% of the foreign currency borrowing is also unhedged mainly due to the Axiata 30-year EMTN and EDOTCO term loan. Plus, there's also USD debt exposure in the frontier markets for both Dialog and Robi. In terms of maturity profile, 20% of group borrowings has a maturity within 2 years, yes, in the next 1 to 2 years, whereby for holdco itself is about 13%. With that, I will pass it back to Vivek to talk with the remaining slides.

Just quickly on moving forward financial year '24. I think as I said earlier, we've delivered a strong quarter 1, '24. We are still cautious about the challenges on the macro environment. And as a result, still our guidance for the year, similar what we had said in the previous -- beginning of the year, which is mid-single-digit growth in revenue, mid-teens improvement of EBIT. CapEx, MYR 6.1 billion, we're still maintaining. Expectation is we should be lower than this number. Go to the next slide. So key developments when it comes to corporate action, I think the MOU, which we've signed a further discussion with Sinar Mas on a potential merger between XL and Smart, it's early stage, early days. I think we're going -- we've started the process of carrying all due diligence, preparation of business plan and computation of synergies and potential agreements to be developed and signed. But that will take some time, come to any conclusion or landing on a definitive decision. Delayering, I think recently, you would have seen we announced the approvals from the respective boards of the book the customer was strong from Link Net into XL. We'll have to go through the process of getting the shareholders' approval in Link Net, which is planned to be completed by -- on 28th of June. Post that, the transfer the of customers will shift. In the meantime, the 2 companies are also preparing for the further contracting for home passes after the 1 million, which is currently in progress gets completed, with another 2 million. The merger in Sri Lanka, Dialog, Airtel I think is currently underway. We expect the shareholders' approval on 13th of June and also specific regulatory approval, which is planning to be completed in quarter 2. EDOTCO, I think we decided to exit out of Myanmar because of the deteriorating environment in Myanmar, and also that process is currently awaiting regulatory approval. I think the time would take longer, 6 to 12 months. But in the meantime, as this process continues, we will have -- we are considering what's the next phase for funding [ EDOTCO ]. So I think risks and opportunity is pretty much very long to everybody. I think funding of fiber deployment, while we see a big opportunity of being a fiber wholesale provider and supporting XL to deliver on home, while converse offering and take a lead there, then we can do it. So we would need investors, and that's a process which we will be running [ currently ], see investors able to [ lead ] part of business, investments on 5G rollout. I mean, I think there's been not much traction so far, and it is not mature, but I think we need to be prepared for that next investment phase for 5G as and when it comes in the respective market. The earliest one, you would expect probably Indonesia. Spectrum, I think investments would be required in [ Indonesia and ] Bangladesh. Indonesia is just mostly for the 5G rollout. Opportunities. I think we have seen a long cycle of high interest rates and strong USD. In our view, that's peaked. The question is timing on when the interest rate starts coming down, whether it happens quarter 3, quarter 4, 1x, 2x this year. But the reality is we -- the interest rates should start coming down. That should help for us exposures in USD funding. I think market, rationality in the market. I think most of our markets, we've seen ARPU improvement. The operators are, in general, reacting positively to any price movement upwards, given the overall size and scale of the operator is we've not seen price wall, we call it a price boost coming in from bidders and you've seen price hardening in all our markets. I think our efforts on portfolio optimization, fundraise, specifically in the infra business and digital businesses should support, some of it would be monetization, but should support further development, so of course, the Dialog and Airtel, all the synergies, which I think should be delivered once the merger gets completed. In the meantime, both the companies together are preparing for the integration plans, but they can be executed only as when the merger gets completed. That's it. So I'll hand over back to Clare and there is an appendix which goes into details across all OpCos, which you can look at it and ask questions. Thank you.

Okay. Thank you, Vivek and Nik. Let's move on to the Q&A session. [Operator Instructions] First up is Prem from CGS.

Okay. Just one question really from me. EDOTCO's recapitalization exercise, how far are we on that trajectory? And when do you expect for any transaction on that front to be completed?

Prem, Nik here. On the EDOTCO fundraising, we are still currently reassessing all the options available. As you know, in this continued high interest rate environment, infrastructure company multiples are actually at quite low levels, right? As such, valuation for the company at the moment, it's quite unattractive at this present point in time. That said, we continue to review closely with management in terms of the growth plans going forward. What we do know is that as it is today, they are still okay from a funding perspective. That said, we continue to sort of like form some views -- we are in the midst of forming some views in terms of what the next steps forward will be with regards to EDOTCO.

So it sounds like the plans have been delayed somewhat.

Yes. Yes. I wouldn't say delayed, it's probably we are having a rethink in terms of how we want to proceed with EDOTCO.

And how does this then affect the growth trajectory for EDOTCO, I suppose, especially now that we've taken EDOTCO Myanmar out. How does the P&L of EDOTCO look like over the next 2 to 3 years?

So the EDOTCO business plan at the moment is still very much predicated on -- well, let's put it this way, with the exception of some of the newer jurisdiction that EDOTCO is operating in, most of the other tower companies are actually self-sustaining. And as such, they continue to grow with their build-to-suits and co-location activities. I think in quarter 1 itself, we can see a very healthy growth in co-locations for EDOTCO in Bangladesh, Cambodia and Philippines. So yes, the loss of Myanmar will be -- will leave a little bit of a dent. However, it is still -- we still believe that it was the right thing to do, looking at how things are developing on the ground in that particular country.

And maybe just to continue on the same part with EDOTCO. How -- what are your thoughts around growth in Malaysia? Is the -- are the delays with DNB slowing down growth at EDOTCO? Or do you think the mobile operators are happy to spend these days?

I think EDOTCO actually [ co-lo ] in Malaysia has now passed 2.3. So while we are not get that many new orders on the expansion, but we have been getting a lot of co-locations and DNB still continues to get orders, as you know, the coverage they expanded from 80% to 85%. So there's still outstanding overall. And what we've also seen is some of the other tower companies when they are given the orders are [indiscernible] and those orders are also coming back to EDOTCO. So I think that DNB is progressing, not at the pace it was earlier, but they're still getting these co-los of DNB as well as the other [ operators here ].

The next question, I think we have from Luis from Citi.

I had 3 questions. The first one is just a clarification on Dialog's finance costs. The increase is purely based on the refinancing -- or the higher interest rates because of the refinancing? Or was there a component of it, which is related to any prepayment penalties or fees in order to facilitate the transaction? The second question is involving Link Net. We saw revenues are down 8% Q-on-Q, but subs were only down 1% and ARPUs were actually up 4%. Does that means really enterprise that is causing the revenue decline for the quarter? And last question is Vivek did mention that the potential consolidation in Indonesia would take some time. But any targets, whether you can have progress within this year or it's more of a 2025 event?

Yes. Okay. I'll cover the question on Dialog finance costs. This was mainly due to the higher financing rate. And there were no essentially one-off prepayment penalties or fees for the refinancing. On the Lankan rupee borrowings, essentially our policy rate in Sri Lanka was between the range of 10% to 16% during the year. And this is in comparison to USD borrowings, which had raised in the range of 6% to 8% on average. Obviously, we are operating in a high interest rate environment at the moment in Sri Lanka. So as the economy improves and as the expectation of rate cuts in the U.S. starts to happen, then there's a possibility that the rate range -- the higher rate range in Sri Lanka will also moderate as we go forward.

Yes. I think normally that you come [indiscernible] the fact that the subs and ARPU, which we have published in our quarterly disclosure related to the residential business where revenues dropped by 1% quarter-on-quarter. However, the enterprise contribution took a step down at [ 6% ]. It comes mainly due to the fact that the fourth quarter is generally about a quarter for enterprise, given that [indiscernible] project completions at the end of this year. Also, we've defocused on project-based revenues in order to rationalize some price funds, focused on recurring connectivity revenue and less on project-based one-off. So both these effects has the drop down in Indonesia. Your last was on EDOTCO exit from Myanmar or?

Yes, on the consolidation in Indonesia?