KUALA LUMPUR (Oct 9): Axiata Group Bhd’s share price has drifted to a 10-year low, which raises the question as to whether the regional telco is an attractive investment.

Analysts contacted by The Edge say it was a mixed bag of reasons that caused the downward trend since last year when Axiata and DiGi’s largest shareholder, Telenor ASA called off merger talks.

Apart from rising competition that squeezed the already thin profit margin, its exposure to regulatory risks in the countries where it has presence is another reason for the selling pressure.

Year to date, Axiata, in which Khazanah Nasional Bhd holds a 37.2% stake, has fallen as much as 30% from RM4.14 at the start of the year to RM2.90, shedding some RM11.19 billion in market value this year.

Both Employee Provident Fund and Permodalan Nasional Bhd hold 16.7% and 11.9% stake in the mobile service provider.

This is in stark comparison to its local peers, such as Digi.com and Maxis Bhd whose share prices have fallen less than 10% so far this year.

“It is possible that given its regional presence, the impact of the COVID-19 pandemic has been more prevalent on the group, compared to other local peers such as Digi.com and Maxis which focus on the home market,” said one local analyst who asked to remain anonymous.

To gauge its attractiveness, the analyst pointed to the telco’s EV/EBITDA (enterprise value/ earnings before interest, taxes, depreciation and amortization) of 5.1.

That is a steep discount to its peers Maxis and Digi.com, the analyst said, whose ratios are at 13.16 and 12.49 respectively.

The group’s price to book ratio is also lowest amongst its peers at 1.64 times, although this is not the usual barometer for telco valuation.

Axiata’s financial performance was affected in the second quarter ended June 30, 2020 (2QFY20) as lockdown measures resulted in a decline in consumer physical reloads in its prepaid markets across the region.

“For instance, the impact on the group's sales and service activities at retail outlets, including its prepaid reload business and SIM activation and device sales, has been more significant in the countries in which the group operates where the lockdown measures have been more stringent such as Malaysia, Bangladesh, Sri Lanka and Nepal,” the group said in its results note for the second quarter ended June 30, 2020.

Areca Capital Sdn Bhd CEO Danny Wong concurs that operating regionally has posed more risks for Axiata coupled with added pressure from the COVID-19 pandemic.

“It’s also more competitive now as telco players race to get on the 5G bandwagon. There’s higher capital outlay it has to incur and at the same time with more product choices in the market, its average revenue per user has been affected. This would affect their margins,” Wong told The Edge.

Dividend is a key factor that attracts investors to put their money in telcos.

Lower dividend declared, according to Malacca Securities Sdn Bhd head of research Loui Low, could be another reason for the selling pressure on Axiata. The group declared a dividend of two sen for the six-month period ended June 30 (1HFY20) compared with five sen a year ago.

The group’s net profit was down substantially to RM268.12 million for 1HFY20 against RM945.7 million previously, no thanks to the COVID-19 pandemic. The earnings contraction was bigger than analysts expected.

Maybank IB Research forecasts dividend per share of four sen for the financial year ending Dec 31, 2020 (FY20). Based on the dividend forecast, Axiata’s dividend yield is barely 1.37%.  

All said, analysts are split on their views of the stock, which has 12 'buy' calls, 14 'holds' and one 'sell', with target prices ranging from RM3.20 to RM4.50.

In a recent note, JF Apex Securities Bhd analyst Lee Cherng Wee, who has a buy call on the stock, acknowledged that Axiata has had a challenging year, but said the company had felt the full impact of the COVID-19 outbreak in April and has since started to recover with revenue growth climbing back to pre-lockdown levels.

He said earnings growth is expected to accelerate in 2H20 with lockdowns being lifted and economies restarting.

AmInvestment Bank analyst, Alex Goh, who also has a 'buy' call, noted that although Axiata’s EV/EBITDA is trading at a bargain compared to its peers, the regional operator has excellent prospects to monetising its multiple businesses.