This article first appeared in The Edge Malaysia Weekly on June 24, 2024 - June 30, 2024
WITH global interest rates no longer on the rise, and at least one major central bank already trimming rates, Edotco Group Sdn Bhd — the world’s sixth largest telecom tower company — is all set for better days ahead, having prepped itself to welcome new strategic partners over the past two years.
“When interest rates are high, the IRR (internal rate of return) expectation for many investors is high. While there’s a lot of interest in Edotco, the [valuations] have not been in line with what we would have expected,” Axiata Group Bhd (KL:AXIATA) CEO and managing director Vivek Sood tells The Edge in a recent interview.
“Once the interest rate cycle starts coming down, once we are able to deal with these country-specific issues [for Edotco], then it may be the opportune time for us to re-look at it [strategic investors] or, eventually, go for listing,” says Vivek.
He is optimistic that global interest rates will trend lower in the long term, despite the evolving narratives in this area.
“Every day is a different story from the US Federal Reserve. I think [there will be] at least one cycle this year, which means 25 basis points, we don’t know. But, eventually, it will come down right? I mean, it is not sustainable.”
Axiata currently holds 63% of Edotco; INCJ owns 21.14%; Khazanah Nasional Bhd’s Mount Bintang Ventures Sdn Bhd has 10.57%; and Kumpulan Wang Persaraan (Diperbadankan), 5.29%.
A key part of Axiata’s strategy to boost Edotco’s valuations is addressing country-specific challenges, particularly in Myanmar, says Vivek, adding that the political instability in the country has made it a point of concern for potential buyers and investors.
“Myanmar was one of the concerns. We did say let’s first deal with the Myanmar situation. I think that’s progressing well. It’s just waiting now for regulatory approval,” he says.
In April this year, Axiata announced that it was exiting its telecom tower business in Myanmar for US$150 million (RM706.6 million) cash and aiming to complete the deal within 12 months.
“We are hopeful [of closing the deal] earlier, but let’s see,” says Vivek, pointing out that the divestment is currently being dealt with by a potential local buyer in Myanmar.
“We have been making those applications, but he [the potential buyer] has been fronting the discussions with the regulator [in Myanmar]. I mean, [the Myanmar government is] still functional.”
As such, Vivek says the focus is on ensuring that all regulatory requirements in Myanmar are effectively met, paving the way for a smooth ownership transfer.
As at end-2023, Edotco owned and managed about 3,000 telecom towers in Myanmar, out of the group’s portfolio of nearly 59,000 towers. Myanmar contributed about RM315 million, or 11%, of Edotco’s total revenue of RM2.79 billion for the financial year ended Dec 31, 2023 (FY2023).
In that financial year, the company incurred a net loss of RM905 million, versus a net profit of RM119 million in FY2022, mainly as a result of a higher net finance cost, unrealised foreign exchange losses and impairment of assets for its Pakistan and Myanmar operations.
For the first quarter of FY2024 (1QFY2024), its net loss narrowed to RM5 million, from RM36 million a year ago, on the back of a 7.2% year-on-year growth in revenue to RM613 million, from RM572 million.
Edotco’s borrowings climbed to RM6.45 billion in 1QFY2024, from RM6.32 billion in FY2023 and RM5.22 billion in FY2022. Cash and bank balances, excluding the Myanmar operations, stood at RM582 million in 1QFY2024, having inched up from RM574 million in FY2023.
Apart from divesting the Myanmar operations, another key area that requires management’s attention is Edotco’s balance sheet, according to Vivek, as telecom tower companies are no longer able to expand rapidly by leveraging cheap borrowings.
“What we are now looking at for Edotco is how much balance sheet exposure they want to take. That has clearly been revisited. So, it’s not going to be a crazy growth trajectory. The key target for them is tenancies, versus new towers. So, how many new tenants you get on the existing towers is the key priority, rather than building new towers,” he says.
“Also, there are still some moving parts. For example, in the Philippines, which we have just entered, we have not seen growth in that market. In Malaysia, what is going to be the impact of the CelcomDigi merger on Edotco? Those are the little concerns in those markets. All those are falling in place.”
Despite these challenges, Vivek stresses that Edotco remains a dominant player in its key markets.
“In Malaysia, a good example is DNB (Digital Nasional Bhd), where we are getting nearly 30% of the towers [jobs from DNB].
“There are [other] smaller players in all the markets, but we are pretty much the No 1 tower company in most of the geographies where we have a presence.”
As Axiata navigates the complex macroeconomic landscape, its strategic preparations for Edotco reflect a mix of caution and optimism. Vivek reiterates, however, that there is no urgency for the company to undertake any corporate exercise for now.
“In the long term, however, we will need to get external funding for that business. The timing for that may be not now,” he says.
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