Over the years, Axiata Group Bhd has gained a sizeable foothold in the emerging markets of Sri Lanka, Bangladesh, Cambodia, India and most recently Nepal. However, investors are more focused on the challenges Axiata is facing on the home front, which contributed 65.3% of normalised net profit in 1H2016. This year alone, Axiata’s home company, Celcom’s normalised net profit fell 25.4% due to stiff competition especially from Telekom Malaysia Bhd, DiGi.Com Bhd and U Mobile Sdn Bhd. Against this backdrop, Axiata has trimmed its dividend this year to keep its capital expenditure (capex) plans on track. Subsequently, there were reports last week that Axiata plans to raise US$700 million in cash by reducing its holdings in some foreign operations. Axiata last month declared an interim dividend of five sen per share, down from eight sen previously. If the company maintains its final dividend at 12 sen per share, that would give a total dividend payout of 17 sen, down 15% from the previous year. Since most telcos have been labelled dividend stocks, the reduction of the dividend has put some selling pressure on Axiata’s share price, which has fallen 12.6% year on year (y-o-y) to close at RM5.32 last week. Some analysts are concerned about further dividend cuts however unlike its peers, DiGi.Com Bhd and Maxis Bhd, Axiata is not a pure dividend yield counter. The group’s foreign investments businesses have been slow however they are in the most populous countries in the world. Axiata has a 66.4% stake in PT XL Axiata Tbk in Indonesia that serves 42 million subscribers. It also has 19.8% equity interest in India-based Idea Cellular Ltd that serves a whopping 172 million subscribers. In Bangladesh, Axiata’s 91.59%-controlled Robi Axiata Ltd serves 28.3 million subscribers and also has an 83.32% stake in Sri Lanka’s largest mobile operator, Dialog Axiata Plc, that serves 10.9 million subscribers. In Cambodia, 95.3%-controlled Smart Axiata Co Ltd serves 7.6 million subscribers and the recently concluded 80% acquisition of Ncell Private Ltd gives Axiata another 13 million subscribers in Nepal. To top these off it has 28.32% stake in Singapore’s M1 Ltd, which has 2.06 million customers, and Axiata is one of the largest and most diversified telcos in Asia in terms of population coverage. Some investment analysts do not find that attractive, simply because Axiata needs to pour in a lot of money before this large pool of subscribers generates the desired profit. Axiata has already spent RM2.29 billion in capex in the first half of this year and is expected to spend RM5.7 billion for the full year. It is interesting to note that the bulk of the capex has been focused on Indonesia’s XL and Bangladesh’s Robi. At the same time, Indonesia-listed XL has also been one of the worst performing for Axiata in terms of earnings contribution. One reason is the costly but necessary shift from legacy services to data. Based on Axiata’s current gearing the acquisition of Ncell has lifted Axiata’s gross debt-to-Ebitda of 2.46 times and net debt-to-Ebitda of 1.53 times. While there is not much headroom, it is still within the 2.5 times gross debt-to-Ebitda ceiling that would concern ratings agencies. Note that Axiata has over RM8 billion in cash on hand. Moody’s on Sept 1 maintained Axiata’s long-term Baa2 rating. “Leverage increased to 2.7 times in 1H2016 from 2.3 times in December 2015 primarily a result of its partial debt-funded acquisition of Ncell in April 2016,” Moody’s report says. Furthermore, Moody’s expects Axiata’s gross gearing to return to 2.3 times over the next 12 months, “when considering a full-year contribution from Ncell and steady growth in Axiata’s key markets”. Axiata is still expected to reduce its gearing.

Question 1: Based on the case information, analyze the key concerns for Axiata.

Question 2: What are the possible strategic options Axiata may adopt to reduce its gearing or debt level?

Question 3: As a stock analyst, comment on Axiata’s current and future position.

Question 4: Provide your recommendation (Buy or Sell) for Axiata’s stocks? Justify your recommendation.