Business

Tuesday November 3, 2009

Axiata’s Indon unit sees profit growth

By RISEN JAYASEELAN


India unit remains competitive

PETALING JAYA: While its Indian operations remain a challenge, Axiata Group Bhd’s Indonesian unit – Excelcomindo (XL) – continues to perform nicely, highlighting the diversity of Axiata’s businesses and the difficulty in assessing the group’s investment case.

Axiata’s 84%-owned unit XL managed to pull off a 20% rise in net profits for its third quarter ended Sept 30. Other indicators looked good too. Earnings before interest, tax, depreciation and amortisation (EBITDA) margins, a good indication of cash flows, improved by 2.5 percentage points to 46.5%. It also turned free cash flow positive, meaning its operational cash flows were more than its capital expenditures.

XL also grew its revenues and added to its subscriber base. Net gearing also dipped to 3.1 times compared with around 4.8 times six months ago.

Jeffrey Tan of OSK Research said in a report that XL enjoyed a 10% quarter-on-quarter rise in its mobile revenues in the third quarter, ahead of Indosat Tbk (6% growth) and Telekomunikasi Selular (Telkomsel, 7% growth).

“This alludes to XL being able to continue revenue market share gains,” Tan wrote.

XL is Indonesia’s third largest mobile operator, behind Indosat and Telkomsel.

Tan said XL also grew its minutes of use per subscriber by 4% and its average revenue per user by 9%.

Rights issue

Another research analyst wrote that the third-quarter results “reaffirmed XL’s superior execution compared with Indosat.” He also said that having a positive free cash flow “is a significant milestone for this highly-geared telco after three years of aggressive capital expenditure.”

XL’s balance sheet will also get a boost upon the completion of a 1-for-5 rights issue, which will raise around US$300mil. The rights issue is slated for next month and is meant to reduce XL’s debt down to a net gearing of 2.1 times, which is well within the industry norm.

XL’s good fortunes has a strong bearing on parent Axiata, considering that the Indonesian unit makes up about 32% of Axiata’s revenues and EBITDA.

Following XL’s positive results and guidance on its full-year numbers, some analysts have raised Axiata’s projected financial year ending Dec (FY09) earnings by 5%. OSK’s Tan, who had called a “buy” on XL in August (from which time XL’s share price has risen by some 20%), is advising investors to gain exposure to XL via parent Axiata, given XL’s lack of free float.

But XL’s strong performance was not enough for HwangDBS Vickers to change its “fully valued” rating on Axiata. The research house said Axiata’s share price, which closed at RM2.93 yesterday, had run ahead of fundamentals and its Indian operation remained a concern due to an aggressive price war.

It added that Axiata was “unattractive” given that it was trading at a price earnings multiple of 20.1 times FY10 forecast earnings and 5.9 times enterprise value to EBITDA (EV/EBITDA), compared with regional peers, which trade at an average PE multiple of 15.5 times future earnings and 5.5 times EV/EBIDTA.

This also partly explains why CIMB Research is maintaining its “neutral” call on Axiata. While the research house is raising its target price of Axiata due to XL’s good results, its top regional telco pick remains Telkom Indonesia. The latter is trading at a forward PE multiple of 12.7 times and is valued at an EV/EBITDA of 5.3 times (FY10 earnings).

Investors keen on the growth story of Axiata will be keeping a closer eye on its Indian operations. There problems, such as the ongoing price war, are impacting the very viability of the business, leaving investors to wonder if the Indian growth story will ever materialise in the future.

And that is going to be a tough call, considering the highly-competitive nature of the Indian market as well as its huge potential.


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