Axiata’s target to drop net debt to EBITDA target to 2.5-fold achievable

Axiata Group Bhd’s (Axiata) target to drop its net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to 2.5-fold is ‘not a stretch’ to achieve says analysts at Maybank Investment Bank Bhd (Maybank research)

In a recent company report, the research arm highlighted that balance sheet leverage continues to be a major overhang for Axiata as its net debt to EBITDA had climbed up to 3-fold at the end of its third quarter financial year 2023 (3QFY23).

Its management has previously stated that it is targeting to reduce this to 2.5-fold and one of the ways it intends to do so is through potential equity raising from its 63 per cent owned Edotco Group Sdn Bhd (edotco) and 92 per cent-owned Link Net Tbk PT (Linknet).

Based on the assumption of issuance of new shares at 10 to 15-fold EV/EBITDA for both assets, Maybank research opined that every 10 per cent of new edotco equity raised would lower Axiata’s net debt to EBITDA by 0.11-0.20-fold, while every 10 per cent of new Linknet equity raised would lower net debt to EBITDA by 0.03 to 0.06-fold.

Based off this assumption, the research arm believes that it would not be a stretch for Axiata to achieve its ambitious leverage target of 2.5-fold.

In order to maintain a simple majority stake or 50 per cent stake threshold in both assets, the percentage of equity issuance in edotco and Linknet would be 26 per cent and 100 per cent respectively.

Just by retaining a slightly above 50 per cent stake for edotco, Maybank Research opines that Axiata;s net debt to EBITDA would drop to 2.4 to 2.7fold, close to its intended 2.5-fold target.

“And any equity raising at Linknet would only provide further balance sheet headway for Axiata,” they added.

And should Axiata deconsolidate edotco or Linknet without secondary shares transaction, it is expected to lower its net debt to EBITDA to 2.8-fold.

Overall, Maybank research guides that they continue to view Axiata’s overall risk-reward profile as being positive with net profit recovery and its balance sheet repair as potential re-rating cataluysts.

They reiterate their ‘Buy’ call on the Telco group with an unchanged RM2.00 sum of parts based target price.