This article first appeared in The Edge Malaysia Weekly on June 24, 2024 - June 30, 2024

GOING by the line of questioning at Axiata Group Bhd’s (KL:AXIATA) recent annual general meeting (AGM), it seems that the multibillion-ringgit losses booked in 2023 when exiting its Nepal investment was the last straw for impatient shareholders, who have received less than their desired “20 sen per share” dividend for eight years now (see Chart 1).

Adding salt to that wound was Axiata’s decision in April to exit Edotco Group Sdn Bhd’s telecommunications tower operations in Myanmar, another frontier market, and also likely at a loss.

Still, Vivek Sood, group CEO and managing director of Axiata, was noticeably more confident when speaking of the group’s prospects at the AGM compared to a year ago in an interview with The Edge, largely due to an improvement in the broader macroeconomic conditions. He is no stranger to what investors look for, having not only run operations in frontier markets but also fielding questions about returns to shareholders in his former role as Axiata’s group chief financial officer, which he held from 2017 before assuming his current post in March 2023.

“My guess is we should be able to get back to that kind of level [20 sen dividend per share] by 2028 … but we should be able to get back. [More importantly] this whole transformation will increase the value of our shares over the long term as each of the assets [in the region] start generating the desired returns,” Vivek tells The Edge.

According to him, that “20 sen dividend per share” that Axiata had wanted to deliver to shareholders annually by as early as 2025 — which the company used to pay out annually between 2012 and 2015 — had to be delayed when it became clear that it needed to bolster the market position of its Indonesian investment PT XL Axiata Tbk (XL). That was when XL’s rivals, PT Indosat Tbk (Indosat Ooredoo) and CK Hutchison Holdings Ltd’s PT Hutchison 3 Indonesia, merged to become PT Indosat Ooredoo Hutchison Tbk (IOH) in 2022 to become the archipelago’s new second-largest mobile telecoms operator.

“We could have said XL remains what it is, but being a marginal player, competing with the other two [in Indonesia] would have again struggled when 5G comes in … we then decided we should move XL to being the No 1 converged operator in the market. So, we acquired LinkNet so that they can actually start selling fixed and mobile converged [offerings] … Obviously, it has a short-term impact because we put in money to acquire [LinkNet]. So, that’s the reason we moved away from what we were talking about, 20 sen at that point in time, to maybe 10 sen in the short term, but make [Indonesia] more long-term value accretive, sustainable,” says Vivek.

He notes a similar rationale when deciding to give up its 100% ownership of Celcom (M) Bhd in return for a 33.1% stake in a much bigger Malaysian player in CelcomDigi Bhd to make the businesses more sustainable in the long term, especially with the connectivity business “getting somewhat commoditised”.

“Celcom used to give around RM1.1 billion profit for us when we owned 100%. We could have said that we stay owning 100% of Celcom and continue giving high dividends. But that would have meant long-term sustainability [issues] in a market that has had zero growth or 1% growth in the last four years,” says Vivek.

“We have four players, plus the MVNOs (mobile virtual network operators) coming in, meaning it is going to be long term, not sustainable if you do not get the benefit of synergies [from strategic partnerships]. We decided to merge with Digi, become lower in terms of ownership of the merged [entity] and deliver on RM8 billion in synergies.

“But what happened is, two years on, you have integration costs ... For example, we used to get 100% [of that RM1.1 billion profit from owning 100% of Celcom]. Now, we get 33%, which is equal to RM500 million. That is RM600 million [less] because of the merger. But long term, [an enlarged CelcomDigi] is more sustainable, more value accretive.”

He points out that shareholders were given a one-off special dividend of four sen per share in 2022, on top of the usual 10 sen per share, partly from the proceeds from merging Celcom with the Telenor Asia ASA-led Digi.Com Bhd to create CelcomDigi.

A dividend per share of 10 sen means a payout of about RM900 million per year. This puts the target 20 sen dividend per share by 2028 at roughly RM1.8 billion per annum.

That is a near-term challenge because Axiata is looking to bring down its net debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) level to 2.5 times by 2026. As it is, its net debt-to-Ebitda had come down from 3.36 times at end-December 2023 (4Q2023) to 3.01 times at end-March 2024 (1Q2024) (see Chart 2).

Axiata’s cash balance stood at RM4.41 billion while its borrowings stood at RM3.26 billion, according to its audited financial statement as at end-March 2024.

Still, that Axiata’s operating companies — including its 33.1%-owned associate CelcomDigi — are committed to returning at least 50% cash annually as dividends to the parent company underpins Axiata’s desire to return at least 10 sen dividend per share per annum from so-called business-as-usual operations in the near to medium term in Axiata’s broader transformation towards becoming a sustainable dividend-paying regional telco turned technology company by 2028, says Vivek.

“One of the things we decided was long-term sustainability became more important than the short-term dividend play. We could have continued paying that dividend, but then we would have squeezed long-term sustainability of the business,” he elaborates.

In Indonesia, the decision to explore a potential merger between XL and Smartfren, for which details should be forthcoming by year end once due diligence is completed to pave the way for a definitive agreement, is also to fortify the combined entity’s market position and spectrum holdings. LinkNet is to focus on the fibre wholesale network while XL becomes an asset-light entity spearheading the mobile services expansion.

“We are going through the process of moving customers from LinkNet to XL. All the fixed broadband customers will move to XL. LinkNet becomes basically a fibre wholesale company that can sell to XL and others, and XL becomes an asset-light, fixed-mobile convergence ServCo (service company) that will sell bundled fixed mobile and content to consumers, but will not own the infrastructure. So that, I think, is something we would have executed, hopefully, by the end of this year,” says Vivek.

The eventual shareholding of Axiata in the enlarged Indonesian mobile entity has yet to be decided. That XL and Smartfren are both listed companies means that the combined entity would have the capacity to tap the capital market rather than seek additional capital injection from Axiata should provide its shareholders some comfort.

When asked by shareholders to explain the losses in Nepal and Myanmar at the AGM on May 30, Vivek told shareholders that the two countries “have been learnings” for Axiata and that the group would “reflect on them when making future decisions”.

Axiata chairman Tan Sri Shahril Ridza Ridzuan said the group had enhanced the board investment committee to scrutinise capital allocation to further minimise risk and understand how to respond when new risks and changes happen in frontier markets.

“Sometimes, it is the right decision going in, but over the course of ownership, politics and regulations change. We also need to respond to that and think about how we can minimise those risks. And in the case of Nepal and Myanmar, to exit those markets when necessary,” Sharil told shareholders during the virtual AGM.

Still, he defended Axiata’s entry into Nepal in 2016, telling shareholders that the company had repatriated RM2.5 billion in dividends from NCell and the decision to exit Nepal was due to changes in the political and regulatory regime, and not the underlying performance of the company.

It is understood that the net loss from exiting Nepal is “about RM2 billion”, after taking into consideration the dividends repatriated and that the decision to exit also had to do with additional taxation issues as well as a potential non-renewal of its telecom licence in 2029.

According to Vivek, Axiata has repatriated more than RM6.3 billion in dividends from its operating companies outside Malaysia over the years and that frontier markets remain attractive in terms of potential demand growth. He adds that the group “will always be watchful of how much capital is allocated to these markets and what needs to be done to make the operations sustainable over the long term”.

Moreover, Axiata needs to have a portfolio of strong assets to be able to sustainably pay dividends, he notes. Put another way, its 33.1% stake in CelcomDigi alone would not allow the company to deliver that 20 sen dividend per share sustainably, at least not in the medium term.

Asked at the AGM why Axiata is not looking to exit the other frontier markets and focus on investments in Malaysia, Shahril told shareholders: “Axiata exists as a regional entity and Advancing Asia is our vision and our purpose. Many of our international businesses remain very strong. Our key markets continue to do well and continue to grow and have delivered RM6.3 billion in dividends over the years. At the same time, we periodically assess our overall portfolio construct and the attractiveness of those assets. We may come to a decision in relation to the acquisition or disposal of assets or companies in all markets, including Malaysia, to improve our shareholders’ returns over time”.

While the exit from Nepal and Myanmar was unexpected, Axiata’s operating companies in Cambodia, Sri Lanka and Bangladesh are doing well, Vivek tells The Edge. Dialog Sri Lanka and Smart Cambodia are market leaders, while Robi Bangladesh is the No 2 player after Grameenphone.

“We still think the position in these markets is very strong for us to be able to deliver long-term value,” he says, noting that Axiata has been in Sri Lanka and Bangladesh since 1995 and 1996 respectively.

Vivek elaborates, “[Smart] Cambodia generates more than US$100 million profit every year, and it’s a US dollar country that has been growing strong in the high single digit year on year, and has zero debt … which means it pays US$100 million equivalent as dividend for us. So, should I be concerned about that country where you have dollar currency and a company is doing well, the number one operator that continues to grow, pays dividends and has no leverage on its balance sheet?

“[Robi] Bangladesh, yes, there are macro challenges. However, we’ve been growing at a high double-digit rate year on year. Our profits from 2022 and 2023 have grown by 2½ times. In terms of market share, we have been beating the other two operators. So, the operational performance has been strong, the returns have been strong. We just have to deal with the macro headwinds, which is a timing issue, in our view, because of global interest rates going up [and] inflation. I think once that starts tapering down, you would have a much better environment. But operationally, [Bangladesh is] very strong.

“[Dialog] Sri Lanka. The economy is coming to some level of stability and the company has done extremely well, bringing down costs, shutting down some of the unprofitable lines of business and continuing to manage their dollar exposure well.”

He notes that Dialog Sri Lanka has reduced its US dollar debt of about US$260 million to about US$135 million. “We converted some of it into local currency, where interest rates are higher, but you remove that [US dollar] exposure.”

Without saying whether it is right or wrong to exit frontier markets, Vivek says that to Axiata, it is more important to make sure its operating companies abroad are resilient and can continue to grow “without overly exposing ourselves, which means balance sheet management is important, capex management is important”.

Cost management is even more important should interest rates stay high.

“Obviously, we never, at that point in time, envisaged that interest rates would go up to such an extent. I mean, nobody [expected it]. We all lived for 10 years in a zero-interest-rate environment. We thought interest rates globally were going to be at that [low] level … But suddenly, interest rates started going up. You saw the macro challenges coming into our frontier markets which, again, impacted the cash flows of these companies,” he adds.

Noting that the high cost of debt from higher interest rates also impacts Axiata’s ability to pay higher dividends, Vivek says a lot of attention goes to “creating long-term value in Malaysia and Indonesia and building resilience in frontier markets [that face macro] challenges”.

Having unlocked value at Celcom for shareholders and strengthened its market position in Malaysia, Vivek tells The Edge that what he spends the most time on now “is really around strategy and structural transformation in Indonesia”.

Axiata’s 33.1% stake in CelcomDigi is worth about RM14.4 billion — or about 59% of the former’s market cap — while the latter’s market cap stood at RM43.52 billion as at June 20.

With XL’s market capitalisation at IDR28.09 trillion (RM8.03 billion) on June 20, Axiata’s 66.5% shareholding in the company is valued at about RM5.34 billion or just under 22% of its market cap of RM24.33 billion as at June 20.

That means Axiata’s 82.3% stake in Dialog Sri Lanka, 61.8% in Robi Bangladesh, 72.5% in Smart Cambodia, 63% in Edotco and in its digital businesses (78.1% in Boost Holdings, 63.5% in Axiata Digital & Analytics Sdn Bhd and 100% in Axiata Digital Labs) are collectively worth only RM4.6 billion — enough to pay about 50 sen dividend per share, our back-of-the-envelope calculations show.

Realistically, due to macro challenges, it would be hard for Axiata to get a good exit price, even if it were looking to sell. The company is open to corporate manoeuvres that can enhance the value of its frontier operations but is not actively looking for buyers for these entities at this time.

“I’m not getting into that discussion whether it’s right to exit and pay money to shareholders. I’m saying that as a CEO, my role is first to ensure these countries become resilient, that they are least exposed when it comes to the macro challenges, that they continue to grow, continue to build value. And [if the situation warrants it] we’ll come to the decision on what we need to do. That’s not [warranted] at this point in time,” Vivek says, noting that Axiata has delivered real value to the people in Sri Lanka, Bangladesh and Cambodia over the years, beyond just telecom services.

Rather than unlocking value, Vivek sees strategic changes at its operating companies as collective moves to build sustainable value towards being an entity that can deliver sustainable dividends to shareholders, he says, pointing to Axiata’s five vectors of value creation (see graphic).

With three government-linked investment companies (GLICs) — Khazanah Nasional Bhd (36.72%), Permodalan Nasional Bhd (18.35%) and the Employees Provident Fund (17.9) — collectively holding 73% of Axiata, its progress towards delivering higher dividends and sustainable value will continue to be closely tracked. 

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