Sustainability & National Contribution Report 2016

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President &
Group CEO’s
Message

Tan SriJamaludin Ibrahim

Managing Director/ President
& Group Chief Executive Officer

Dear Shareholders,

Since its establishment in 2008, Axiata has been growing from strength to strength, delivering strong performance across most of our markets and businesses. Our performance track record and milestones culminated in the realisation of Axiata’s vision of becoming a Regional Champion in 2015. We are now recognised as one of Asia’s leading telecommunications groups.

2016, however, proved to be our most difficult year yet due to significant external challenges and our own internal weaknesses. It was what I refer to as the ‘Perfect Storm’, a unique combination of circumstances that intensified an already daunting business environment.

In the face of these challenges, we maintained our commanding regional standing with approximately 320 million customers across ten countries in the region, with some of our Operating Companies (OpCos) in dominant leadership positions in their markets.

Moving into phase three of our Group’s growth strategy, Axiata remains committed to delivering the value proposition of moderate growth and moderate yield to our shareholders over the longer term. In transforming ourselves into a New Generation Digital Champion, with Axiata 3.0 as our strategy blueprint, we foresee growth opportunities not only in strengthening our core mobile business, but also in new ventures such as communications infrastructure and tower services, fixed-mobile convergence, digital services, and Enterprise Internet-of-Things (IoT).

As such, 2017 will be the year where we can expect solid turnaround in our mobile businesses, while we continue building ourselves into a Digital Champion.

2016 in Review

Group Financial Performance

Despite the challenges we faced which were consistent to the industry, Axiata recorded firm top line growth in 2016. Our revenue broke the RM20 billion barrier when we recorded our highest revenue ever at RM21.6 billion. We saw double-digit Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) which increased by 10.0% to reach RM8.0 billion.

There were three significant factors that created the ‘Perfect Storm’ which led to the Group’s Profit After Tax (PAT) being impacted:

(i) Unprecedented external events
The depreciation and volatility of the Ringgit Malaysia against the US Dollar resulted in the Group recording a substantial pre-tax foreign exchange (forex) loss of RM685.1 million mainly due to US Dollar exposed debt incurred from the acquisition of Ncell.

At the point of the Ncell acquisition in April 2016, the Ringgit Malaysia was at its strongest for the year at approximately RM3.90 against the US Dollar. Unfortunately, by the end of 2016, it had depreciated to RM4.49 against the US Dollar, falling 9% in the fourth quarter alone.

Furthermore, aggressive competition in India with the entry of a disruptive new player at an unheard of scale, resulted in considerably lower contribution from Idea by RM303.7 million.

(ii) Costs related to strategic investments for long-term growth
In strengthening Robi’s market position in Bangladesh with the country’s first telecoms consolidation, the Group incurred merger fee and related costs totalling RM87.1 million. At the same time, Ncell acquisition related costs amounted to RM312.4 million during the year.

Our capex investments for data leadership, especially in Malaysia, Indonesia and Bangladesh, led to a higher depreciation and amortisation (D&A) of RM1.5 billion compared to 2015, including accelerated depreciation at XL and Robi of RM581.5 million. Investments in the Group’s digital/Internet ventures portfolio led to start-up losses in 2016.

(iii) Underperformance at some of our OpCos and Associates
Despite showing early signs of stabilisation in the final two quarters of the year, Celcom registered 2016 PAT results of RM976.3 million versus RM1.3 billion in 2015. Performance at XL, to some extent, also impacted overall performance. Fortunately, this was partially offset by the tower sales gains of XL’s non-strategic assets of RM536.5 million.

As a consequence of these factors, the Group’s PAT for the year was at RM657.2 million, as compared to RM2.6 billion in 2015. If we normalise these numbers to exclude one-off charges and only reflect on operations, the Group’s PAT would be RM1.5 billion. Understandably, the Group’s profitability reflected on Axiata’s share price for the year.

Strengthening Our Position as Asia’s Leading Telco

In 2016, despite all the challenges the Group faced, we delivered stronger performance at some of our other OpCos and recorded key strategic developments during the year.

Despite the hypercompetitive Cambodian telecoms environment, Smart performed exceedingly well, recording yet another year of outstanding performance on the back of very strong growth of data revenue. 2016 revenue, EBITDA and PAT grew double-digits at 20.0%, 19.4% and 26.3% respectively.

In South Asia, Dialog and Ncell continue to strengthen their leadership position in their respective markets with excellent overall performance. Dialog’s 2016 revenue, EBITDA and PAT growth were 16.0%, 21.1% and more than 100% respectively. Ncell registered better than our internal investment and accretion targets to contribute RM1.6 billion in revenue for eight months in 2016. Ncell’s full year revenue grew 2.4%, EBITDA increased 2.3%, and PAT improved 7.8%.

In recent years, we have strengthened our existing operations through in-country M&A exercises in our markets such as Sri Lanka, Cambodia and Indonesia. In 2016, we successfully improved our presence in Bangladesh with the completion of the first telecoms merger in the country with Bharti Airtel Limited to position Robi as the second largest operator in the country serving approximately 33.8 million customers. In a competitive market such as Bangladesh, market consolidation would result in healthy competition and will benefit customers.

During the year, the Axiata footprint was further expanded with the acquisition of Ncell, the number one mobile operator in Nepal, which itself will bring accretion revenue of RM1.6 billion and Profits After Tax and Minority Interests (PATAMI) of RM454.8 million to the Group.

Together, these developments mark significant milestones for the Group in solidifying our stronghold in the region.

Our infrastructure services company, edotco, with a portfolio of over 25,000 operated and managed towers in five countries, has become an important source of growth and a potential dividend yielding company in the medium-term. One of the Group’s milestones in 2016 was the maiden equity raising exercise for edotco which set a new benchmark as the largest global tower sector private placement for the year at a record of USD600 million. The placement exercise brought about a very encouraging valuation of edotco at USD1.5 billion, representing an Enterprise Value (EV) to EBITDA multiple of 12.5x1.

With the additional capital injection of up to USD400 million, edotco has the capacity to execute its growth strategies through acquisitions and further in-country opportunities. The placement of secondary shares of USD200 million will help Axiata reduce its debt.

We are very encouraged by this deal as it represents valuable external endorsement of edotco’s performance to date and future growth potential of the company. We remain determined to make edotco a world-class business and one of the world’s largest independent tower companies by 2020.

Axiata Digital, our digital services arm, made some significant inroads in 2017 which reinforces our digital ambitions. Our portfolio of digital companies has grown to 29 with three subsidiaries and seven joint ventures, and serve 32 million customers, 30% of which are new to Axiata. Collectively, our e-commerce marketplaces companies registered a Gross Merchandise Value (GMV) of USD257 million.

Some notable developments at Axiata Digital in 2016 include the monetisation of its assets through private placement exercises of two portfolio companies - Freedompop and Adknowledge Asia; making its first digital service investment in India; successfully rolling out its anchor Digital Music app Yonder Music in two OpCo countries; continuing its e-commerce leadership in respective markets as strong number two players; and establishing mobile money services in five countries.

2017 Outlook

Challenges for 2017

We remain cognisant of the challenges we will face on the road ahead both internally and externally.

In our core markets we are continuing to witness heightened price competition especially for data services, which on the back of a 50% Year on Year (YoY) yield decline in 2016, continues to show a downward trend especially in Malaysia, Cambodia and Indonesia. In India, we expect the competition to continue in 2017. It would be ideal if the industry consolidates to allow for more rational and sustainable competition.

Currency volatility and increasingly stringent forex control requirements in Malaysia will be a challenge. Similarly, taxation and regulatory uncertainties continue to exist in all our markets and will be an area the Group will need to successfully navigate.

The performance of Celcom and XL is our greatest focus in 2017. We will also continue to explore various initiatives to manage our balance sheet and US Dollar debt.

Focused and Strategic Plans for 2017

Strategically, we are on the right trajectory, and we remain optimistic about our future with the focused set of strategic initiatives we have set forth for 2017.

We will be aggressive in recapturing our leadership position in certain areas in Malaysia in 2017. Our products and services are generally very competitive but more improvements are required in sales, marketing, network and IT, as well as changes within the organisation.

We are allocating up to RM1.4 billion (USD315 million) capex for Celcom in 2017, the majority of which will be utilised in improving its network quality and coverage. This is essential for Celcom to regain its momentum especially in the prepaid segment. Within its prepaid business, we will be dealing with issues of pricing and packaging, thus correcting our trajectory in 2017.

At XL, the Axis brand has been doing well but significant improvements are now underway to positon and improve the XL brand. There has been good traction with data savvy customers and it is clear from smartphone penetration and rising traffic that we are attracting the right customers. XL’s 4G LTE footprint now spans close to 100 cities and is further supported by its roll out on UMTS900 frequency which significantly improved the quality and reach of its data services. We plan to expand aggressively beyond Java to growth areas in Sumatra, Kalimantan and Sulawesi that would help contribute positively to earnings in 2017.

We expect revenue growth for Celcom and XL to be in line with the industry for 2017 in the first half and exceed industry growth in the fourth quarter.

In the markets where we are the number one operator – Sri Lanka, Nepal and Cambodia – we are committed to out-investing our competitors as we are confident that this is key to maintaining and growing our leadership in the new data-led reality.

Axiata intends to be a clear number one player in 4G and data network leadership in selected areas in all of our markets. To achieve this, we will increase our capex from RM6.1 billion in 2016 to RM6.6 billion in 2017 to fund key technology and network projects to secure the best data network.

At the same time, we intend to achieve product leadership and lead the way in innovation, especially for data-led products and services in the areas of financial services, music, media and entertainment, digital advertising, and Enterprise and Internet of Things (IoT). Where possible, we will execute this via collaborative opportunities and commercial partnerships available in the marketplace, leveraging our Group-wide scale to rapidly launch new and exciting digital products and services across our markets.

To support our more aggressive technology investment, we are implementing a Group-wide Cost Management programme to improve efficiency and profitability within a more sustainable cost structure. Cost optimisation of RM800 million in operational expenditure and capex savings have been built into our 2017 plan, and we aim to achieve RM1.5 billion in additional savings in 2018 and 2019. Our cost savings will be channelled into investments aimed at growing our business for the long-term.

We are at a critical moment in the evolution of our industry and we are increasingly clear on the strategic growth initiatives we must execute to maintain our competitiveness and underpin our future. The new growth areas we are focused on under Axiata 3.0 include:

  • Convergent Networks and Infrastructure – to deliver dedicated services into the home, using the most efficient technology be it fixed or mobile, terrestrial or non-terrestrial, and also building scale in supporting infrastructure investments such as towers and transmission

  • Enterprise and IoT – a relatively new area of focus for the Group but one which is achieving double-digit growth and holds great promise as a multi-billion dollar addressable market in our footprint for Business to Business (B2B) and Business to Business to Consumer (B2B2C) solutions across multiple industries

  • Digital Financial Services (Fintech) – moving beyond digital payments/remittances, into higher value offerings in insurance and micro/nano-credit

  • Media, Entertainment and Advertising – via go-to-market partnerships and investments through Axiata Digital, we will tap new revenues from the explosion of digital content and advertising on our networks

Within our core mobile business, Axiata’s mergers and acquisitions (M&A) focus has always been inorganic through in-country consolidation in our existing footprint to strengthen our market position. We will continue to explore potential merger opportunities where it is immediately value accretive or can result in structural market repair leading to improved long-term market sustainability and Axiata’s leadership.

We are determined to make edotco a world-class business and one of the world’s largest independent tower companies by 2020. To do this, we will aggressively pursue expansion opportunities with the intent to add at least one to two more tower companies within ASEAN and South Asia within the next one to two years.

While in the areas of Enterprise and IoT, Fintech, Media & Adtech, we may make new and select investments into digital businesses, products and solutions where they fit with our strategy for growth.

As a leading telecommunications group in Asia with a diverse portfolio of investments across the region, it has always been a part of our business and responsibility of management to continuously review various strategic portfolio options to ensure long-term value enhancement, and optimal deployment of capital/funding for our growth strategies. In 2017, we will actively evaluate various options and rebalance our portfolio from a risk management perspective to ensure an effective and a balanced portfolio is maintained.

Given the economic and currency volatility the Group is exposed to, we will be looking at various initiatives to manage our US Dollar debt incurred from borrowing for acquisitions and expansion, including hedging and paring down our gearing to a more comfortable level.

Group-wide we will be focusing on some key digitisation initiatives in 2017:

  • Customer facing digitisation efforts such as self-care digital application and dealer registration digital application roll outs

  • Moving sales and marketing efforts onto digitised platforms

  • Enhancing digital and social media platform marketing, analytics and customer engagement

  • Commencing a structured digitisation benchmarking against global and regional peers

  • Setting and measuring Key Performance Indicators (KPIs) to achieve digitisation across the business at both Group and OpCo levels

Advancing Asia Through National Contributions & Talent Development

Throughout the years, we have stayed true to our broader vision of Advancing Asia by piecing together the best in innovation, connectivity and talent. We drive this through our commitments to the triple bottom line of Economic, Environmental and Social (EES) sustainability throughout all our countries of operation in Southeast Asia and South Asia. Our approach to sustainability is underpinned by Axiata’s 4Ps Sustainability Framework which outlines focus areas and initiatives to create long-term value for our stakeholders and pave the way forward for our transition into a New Generation Digital Champion in line with our Advancing Asia vision.

Continued Commitment to National Contribution and Sustainability

As long-term investors in our countries of operations, Axiata stands as one of the largest contributors of Foreign Direct Investment (FDI) and national taxes. The Group continues to contribute to the national development of our countries of operation. Our regional capex spend is now USD11.1 billion1 in eight countries for a period of five years, while our GDP contributions are USD68.2 billion2 in eight countries over the last five years. Throughout our footprint, we have provided direct and indirect employment to over 1.2 million people.

Relentless Pursuit in Building the Digital Ecosystem and Talent Development

Through the Axiata Digital Innovation Fund (ADIF) in partnership with Malaysia Venture Capital Management Berhad (MAVCAP), Axiata continues to support and catalyse the growth of digital entrepreneurs. At a RM100 million fund size, ADIF is the largest and most active digital venture capital fund in Malaysia. Since 2014, ADIF has invested in 12 digital start-ups that have collectively generated approximately RM56.6 million in revenue. Axiata has established the same fund model in Cambodia in 2017, with plans to do the same in Sri Lanka in 2018.

Our flagship corporate social responsibility programme with a commitment of RM100 million over 10 years, the Axiata Young Talent Programme, has contributed towards nation building through the leadership development of 1,129 talented young individuals since the programme’s inception in 2011.

For complete details of our EES initiatives, please refer here in this Annual Report, as well as our standalone Sustainability and National Contribution Report 2016.

Acknowledgement

On behalf of the management of Axiata Group, I would like to thank our Board of Directors for their invaluable insights and support in steering Axiata on its transformation journey towards being a New Generation Digital Champion. To our 25,000 employees across Asia, we are indebted to you for the contributions of your exemplary work ethics and dedication.

I would also like to express our gratitude to our investors, partners and media. Our appreciation also to governments and regulators for your co-operation and facilitation throughout 2016. We remain committed to contributing to the development of your nations for the long-term. Most of all, we would like to acknowledge our approximately 320 million customers for their support and loyalty.

Tan Sri Jamaludin Ibrahim

Managing Director/ President & Group Chief Executive Officer

Footnote

1 Based on 2016 unaudited proforma full year financials