Positive re-rating potential seen as Axiata unlocks value

FOLLOWING a period of uninspiring share price performance, Axiata Group Bhd is beginning to draw renewed investor interest, with its shares up about 10.5% since early June.

The rebound comes as the market responds positively to the group’s efforts to unlock value, according to Hong Leong Investment Bank (HLIB) Research.

The recent rebound is largely driven by growing optimism around its asset monetisation strategy, namely the potential sale of Axiata’s stake in tower unit Edotco Group Sdn Bhd.

HLIB Research in a report this week says the exercise would be “a key near-term catalyst for share price re-rating”. This may come following the recent divestment of the group’s Myanmar tower assets.

The monetisation of Edotco, possibly involving a Khazanah Nasional Bhd-Employees Provident Fund consortium, could generate up to RM6.3bil in proceeds.

Coupled with proceeds from the recent XL Axiata-Smartfren merger, it could provide Axiata with much-needed financial breathing room.

However, the strategy comes with potential trade-offs.

While it may enhance headline financials and ease balance sheet pressure, it could also weigh on Axiata’s long-term earnings stability.

S&P Global Ratings, for example, had revised down its assessment of the group’s stand-alone credit profile to BBB- (from from BBB) in March for weakening earnings quality after XL’s merger with Smartfren, despite the deal bringing leverage to below 2.5 times. Leverage could further improve with the potential monetisation of its 63% stake in Edotco.

That said, the rating agency affirmed its BBB long-term issuer credit rating on Axiata. This reflected the agency’s expectation that Axiata will maintain broadly stable operating performance owing to its geographically diversified portfolio and also likely to maintain a debt-to-Ebitda ratio of two to three times over the next 24 months.

Axiata remains a closely watched stock because of its status as a key government-linked company under Khazanah.

It currently commands 15 “buy” calls, alongside several “hold” recommendations and just four “sell” ratings.

That said, sustaining confidence in the long run will require visibility on how Axiata plans to rebuild earnings growth.