CORPORATE MECHANISM IN AXIATA GROUP BHD

Yow Yu Xuan

Universiti Utara Malaysia

Abstract

The purpose of this study is to identify the corporate governance and its impacts on firm
performances and risk of Axiata Company. All the data in this study obtained from the
official annual report of Axiata Company from 2011 to 2015. Several variables have been
used to measure their correlations and coefficients with return on asset (ROA) which
represent the profitability of the company. The liquidity ratio, average collection period,
external factors, and index score of corporate governance are used to explain their
relation with the firm performance of Axiata Company among the 5 years. However,
among the eleven determinants, the finding shows that there is only one variable is
significantly related to the company profitability, which is current ratio representing the
liquidity ratio, while the others are insignificant to the ROA.

Keywords: Profitability, Corporate Government, Counterparty Risk, Liquidity Risk.

1.0 Introduction

Axiata Group has famous as one of the largest telecommunication companies in Asia.
The subsidiaries of the group are located at few Asia countries, for example, ‘Celcom’ in
Malaysia, ‘M1’ in Singapore, ‘XL’ in Indonesia, ‘Idea’ in India, ‘Robi’ in Bangladesh,
‘HELLO’ in Cambodia, and ‘Dialog’ in Sri Lanka. Axiata Group was formerly known as
TM International Berhad (TMI), and it was parts of Telecom Malaysia Berhad (TM).
TMI was separated from TM and was listed in Bursa Malaysia in 2008. On 2 April 2009,
TMI was officially launching its new name, Axiata.

Celcom is one of the brands under Axiata Group which operates in Malaysia. It is
famous as the most experienced mobile telecommunications company with the widest
network coverage in the country. It covers 95% and 88.1% of the population with its 2G
and 3G networks respectively. Both prepaid and postpaid mobile services are provided by
Celcom and it has more than 12 million subscribers are using Celcom mobile services.

According to Winifred, A. and Thoppil, D. A. (2017), approximately two-thirds

of Axiata’s net profit is come from Celcom. Currently, Celcom is facing an extreme price
competition and regulatory challenges in Malaysia as a huge amount of spectrum fees
had been asked by Malaysia government. Therefore, to maintain the stable and
improvement of Axiata performance, the role of corporate governance must be taken
place and to be paid attention on.
2.0 Literature Review

2.1 Corporate Governance and Firm Performance

According to Bhagat and Bolton (2008), the research study on the relation between
corporate governance and firm performance, the results of the study shows that the
separation of CEO and chairman, and the portion of shares owned by board members
have a significant positive correlation with the firms current and post operating
performance. Interestingly, the board independence is inversely correlated with the firms
current and post operating performance. This finding shows that sound corporate
governance is not the only variable to determine the success of one firm. Instead, other
variables are also important and should not be overlooked in order to get impressive
performance in term of profitability.

2.2 Effectiveness of Board Committees

According to Waemustafa and Abdullah (2015), the research study on the relevance of
effectiveness of Shariah Supervisory Board (SSB) shows that there is no significant
relations of an effective SSB towards the choice of Islamic mode of financing in
Malaysia, yet their remuneration have. There is a concept of “cosmetic reason” for the
presence and the utility of SSB in Malaysia. The board committees in companies should
exercise their role and responsibility effectively and efficiently to avoid of being a
“cosmetic reason” for their existence. Each board committees exists for reasons, a non-
functioning board committee should be disbanded to save cost for the company. By
running the board committees efficiently, it would help the company to become more
systematic and get benefits from that.

2.3 Liquidity Risk and Credit Risk

According to Waemustafa and Sukri (2016), the study of the liquidity risk between
Islamic and conventional banks shows the finding of Islamic banks has a better liquidity
performance compared to conventional banks. Another study of determinants of credit
risk in Islamic banks and conventional banks by Waemustafa, W. and Sukri, S. (2015),
shows that the variable of liquidity has an inverse significant relation to credit risk for
conventional bank, but a positive insignificant relation in Islamic bank. The principle of
Mudarabah and Musharakah the exercise in Islamic banking allows them to maintain a
more efficient operation based on real economic activities. With the little alternative for
Islamic bank to acquire external financing sources, this constrains the Islamic bank to
control their liquidity risk within themselves in order to come up with an additional
alternative other than Islamic capital market to maintain a fit solution for their liquidity
condition. This indicates that firms may create a suitable policy and strategy for their own
in order to overcome the liquidity risk.

2.4 Counterparty Risk

According to Jorion and Zhang (2009), counterparty risk arises when one firm, who is a
debtor, failed to execute its contractual obligation and causes its creditor to be in a
financial distress situation. It is noticeable that when the dissolved debtor is the major
customer of the creditor firm, it will bring stronger counterparty consequences to the
creditor due to the loss of the creditor facing is not only the current loss, but it will also
affect the future business performances. For the telecommunication industry, it is
essential to set up a sound framework in order to govern the counterparty risk that may
face by the company, as majority of the companies in telecommunication industry
provide a post-paid service, and thus the counterparty risk is strongly influential in this
particular industry.
3.0 Descriptive Analysis

3.1 Descriptive Statistics

Table Result 1. Descriptive Statistics Regression Analysis for Axiata Company Specific
Risk Determinants to Profitability.

Descriptive Statistics
Std.
Mean Deviation N
ROA .126 .0701 5
Leverage .079 .0178 5
Size 18350363.60 2098380.079
5
0 6
Average Collection Period 1834.605 1385.1758 5
Current Ratio 8.025 12.8605 5
GDP 5.300 .4950 5
Unemployment Rate 3.066 .1476 5
Inflation 2.440 .6693 5
Exchange Rate 3.460 .4917 5
Index Score .945 .0498 5
Remuneration 240000.000 .0000 5

Based on Table Result 1, the average value of ROA among the 5 years is 0.126, and in
Table 1, it shows that the values of ROA from 2012 to 2015 are exceeding the mean,
except 2011. This means that the company is getting profit more than average in these
four years.
Notice that the value of average collection period and current ratio are not as
stable as other variables, as the standard deviation of these two variable is significantly
larger than other variables. The period for the company to collect trade debt is fluctuating
within 5 years, due to the unstable credit sales. It is noticeable that the amount of credit
sales is negative sign in year 2014, and thus contributed to the deviate from the mean of
average collection period within 5 years. The current ratio for 2011 is significantly higher
than other years as the company has a significant lower amount of current liability
compared to other years, and resulted in the deviation of the value from the mean.
3.2 Current Ratio to Profitability
Table Result 2. Correlations Regression Analysis for Axiata Company Specific Risk
Determinants to Profitability.

Correlations
Pearson RO Leve Tota Aver Curr GDP Une Infla Exch Inde Rem
Correlati A rage l age ent mplo tion ange x uner
on Asse Coll Rati yme Rate Scor ation
ts ectio o nt e
n Rate
Peri
od
ROA 1.00 .576 .561 -.321 -.972 .206 .127 -.476 .258 .322
Leverage .576 1.00 -.048 .134 -.557 -.379 -.207 -.819 -.283 .946
Total .561 -.048 1.00 .017 -.699 -.042 .871 -.295 .931 -.341
Assets
Average -.321 .134 .017 1.00 .141 -.939 .314 -.153 .258 .118
Collectio
n Period
Current -.972 -.557 -.699 .141 1.00 -.030 -.327 .539 -.441 -.270
Ratio
GDP .206 -.379 -.042 -.939 -.030 1.00 -.339 .468 -.198 -.369
Unemplo .127 -.207 .871 .314 -.327 -.339 1.00 -.284 .944 -.408
yment
Rate
Inflation -.476 -.819 -.295 -.153 .539 .468 -.284 1.00 -.090 -.736
Exchange .258 -.283 .931 .258 -.441 -.198 .944 -.090 1.00 -.538
Rate
Index .322 .946 -.341 .118 -.270 -.369 -.408 -.736 -.538 1.00
Score
Remuner 1.00
ation
Table Result 3. Stepwise Regression Analysis for Axiata Company Specific Risk
Determinants to Profitability.

Model Summaryb
Adjusted R Std. Error of Durbin-
Model R R Square Square the Estimate Watson
a
1 .972 .945 .927 .0189 2.532
a. Predictors: (Constant), Current Ratio
b. Dependent Variable: ROA

Table Result 4. Anova Regression Analysis for Axiata Company Specific Risk
Determinants to Profitability.

ANOVAa
Sum of Mean
Model Squares Df Square F Sig.
1 Regression .019 1 .019 51.897 .006b
Residual .001 3 .000
Total .020 4
a. Dependent Variable: ROA
b. Predictors: (Constant), Current Ratio

Table Result 5. Coefficients Regression Analysis for Axiata Company Specific Risk
Determinants to Profitability.

Coefficientsa
Standardize
Unstandardize d
d Coefficients Coefficients Collinearity Statistics
Std.
Model B Error Beta t Sig. Tolerance VIF
1 (Constant) .169 .010 16.339 .000
Current
-.005 .001 -.972 -7.204 .006 1.000 1.000
Ratio
a. Dependent Variable: ROA
Table Result 6. Excluded Variables Regression Analysis for Axiata Company Specific
Risk Determinants to Profitability.

Excluded Variablesa
Collinearity Statistics
Partial Minimum
Model Beta In t Sig. Correlation Tolerance VIF Tolerance
1 Leverage .050b .257 .821 .179 .690 1.450 .690
Total
-.232b -1.424 .290 -.710 .511 1.955 .511
Assets
Average
Collection -.188b -1.864 .203 -.797 .980 1.020 .980
Period
GDP .177b 1.646 .242 .758 .999 1.001 .999
Unemploy
-.214b -2.431 .136 -.864 .893 1.120 .893
ment Rate
Inflation .068b .356 .756 .244 .710 1.409 .710
Exchange
-.211b -1.961 .189 -.811 .806 1.241 .806
Rate
Index Score .064b .386 .737 .263 .927 1.079 .927
a. Dependent Variable: ROA
b. Predictors in the Model: (Constant), Current Ratio

The current ratio with P value < 0.1 indicates that the current ratio is significant related to
the company profitability. The beta value of -0.972 shows that the current ratio gives
inverse impacts on profitability. In addition, t value of -7.204 says that the impact of
current ratio on profitability is quite high. These implied that the company will generate
more profit when the current ratio decreases. By related it to asset utilization and cash
conversion, the lower of the receivable enables the company to generate more profit as
the company is able to make investment from the actual cash hold on hand rather than
having more receivable on trade debtors. According to Jorion (2009), the counterparty
risk arises to the creditor when debtors failed to pay back their debt, and causing financial
distress to the creditor. So, by having lower receivables enable the company to handle
counterparty risk more efficiently.
Table 7: Current ratio and net profit after tax.

Years Current Current Current Net Profit

Assets Liabilities Ratio after tax
2011 2,195,645 71,401 30.75089985 62,955
2012 3,804,711 734,189 5.182195593 2,741,384
2013 2,484,611 761,684 3.261997101 2,556,849
2014 538,048 1,243,118 0.432821341 3,465,951
2015 724,236 1,462,522 0.495196653 3,070,921

Table 7 shows that the current ratio is decreasing gradually year by year. This is due to
the firm’s current liability is increasing every years. On the other hand, the current assets
start to decrease from year 2013 to 2014, and rise again in 2015. It is noticeable that there
is a dramatic decline in current assets in 2014, and in the same year, the current liabilities
have a huge increment. However, the annual report of Axiata Company shows the net
profit for 2014 is the highest among the 5 years. The figures also show that as the current
ratio decrease, the more net profit the firm will earn. This may due to the firm utilise their
cash on hand to make investments, and the investments have brought a nice profit to the
company.

Table 8: Average collection period and credit sales.

Years Ending Beginning Average Credit Average

Account Account Account Sales Collection
Receivable Receivable Receivable Period
2011 10789 9146 9968 1643 2,214.33
2012 23044 10789 16917 12255 503.84
2013 25561 23044 24303 2517 3,524.20
2014 6924 25561 16243 (18,637) (318.10)
2015 7964 6924 7444 1040 2,612.56
 Average Collection Period and Credit
Sales
4000 15000
Average Collection Period (Days)
10000

Credit Sales (RM '000)

3000
5000
2000 0
-5000
1000 -10000
-15000
0
1 2 3 4 5 -20000
-1000 -25000

average collection period credit sale

Average collection period measures the average time taken of the company to collect
debt from trade debtors. Table 8 shows the average collection period of Axiata Company
from 2011 to 2015. There is a decrease period of time in 2012. It explained that there is
an increasing efficiency of Axiata Company in handling debt in that particular year.
However, the period of average collection goes up in 2013, which is the longest period
among the 5 years. It shows that the company has a higher amount of average account
receivable in 2013 compared to other years. Interestingly, the average collection period
for year 2014 is negative sign, due to the drop of credit sales in that year. This might
because of the company want to decrease the credit sales, therefore resulting in the
reducing period of collecting debt, and lower the counterparty risk. However, the value is
increasing in year 2015.

Table 9: Total assets, liabilities, equity and leverage ratio.

Years Total Assets Total Liabilities Equity Leverage

2011 16,045,149.00 878,067 15,167,082 0.057893
2012 17,656,468.00 1,541,804 16,114,664 0.095677
2013 17,476,464.00 1,585,017 15,891,447 0.099740
2014 18,953,923.00 1,243,118 17,710,805 0.070190
2015 21,619,814.00 1,464,035 20,155,779 0.072636
 Total Assets, Liabilities, Equity and Leverage
Ratio
25,000,000 0.12

20,000,000 0.1

0.08 Total Assets

15,000,000
0.06 Total Liabilities
10,000,000 Equity
0.04
5,000,000 Leverage
0.02

0 0
2011 2012 2013 2014 2015

Table 9 shows the total value of assets, liabilities, equity, and leverage ratio of Axiata
Company from year 2011 to 2015. It shows that the company’s total liabilities have a
significant increase in 2012, and continue rising in 2013. These have contributed to the
increment of leverage ratio. It indicates that the company is using debt financing
frequently rather than equity financing in that particular years. However, the leverage
ratio has dropped in 2014, as the company reduces the use of debt financing. Using debt
financing may secure the company ownership and also get the tax deductible advantage,
but too much debt financing may bring the risk of bankruptcy to the firm if the firm is
unable to pay back the debt. On the other hand, using equity financing enable the firm to
not pay monthly interest payment, but the owner may lose ownership on the firm.
Therefore, the management team should set up policies and strategies on using which
particular financing techniques to suit the situation, and get a balance from these two
techniques.

3.3 External Factors to Profitability

According to Table Result 1, it shows that among the four external factors, GDP,
unemployment rate, inflation rate, and exchange rate, all have a positive insignificant
relationship with profitability, except for the inflation rate which has a negative
insignificant relationship with profitability. While in Table Result 5, it indicates that the
GDP and inflation rate have an insignificant positive influence on the firm profitability,
while both unemployment rate and exchange rate have an insignificant negative influence
on the firm profitability. These implied that as the GDP increases, the economic is growth,
and this brings more demand to the company and it boosts its profits at the same time.
Besides that, as the unemployment rate decrease, the company is more profitable,
because people with jobs are able to have a higher purchasing power. Furthermore, the
company is making more profit when the currency of Ringgit Malaysia goes down. This
may due to the company is favorable by the foreign market as the currency for Malaysia
is lower. On the other hand, as the inflation rate increases, this increases the profit of the
company. This is because of the price of products and services increased bring profit to
the company. It should be noticed that all the mentioned external factors are not
significant to the company’s profitability.

3.4 Index Score to Profitability

From Table Result 1 and 5, we can see that the index score has an insignificant positive
correlation with the company’s profitability which represented by ROA ratio. It indicates
that the more efficient the board they are, the higher profit that the company will get.
However, the t value of 0.386 shows that the influence of the effectiveness of the firm’s
corporate governance on the profitability is quite low compared to others variables. It
may due to the role of the CEO is just act as executor and follow the direction of those
who monitor and take in charge of the real power of the company.
4.0 Discussion and Recommendation

The overall index score of Axiata Company among 2011 to 2015 was showing
favourable corporate governance performance. The statistics show that only one variable,
which is the effectiveness of asset utilization and cash conversion is giving a significant
inverse impact on profitability of the company. Therefore, the company should focus
more on handling its liquidity and counterparty risk as this will give a significant adverse
impact to the company if the management failed to manage it well. Therefore, there are
few suggestion and recommendation for the company to improve the company
performance.

Comply with the best practices of Malaysia Code on Corporate Governance 2012
or alternately explain the reason of not complying. According to MCCG 2012, the
independence of board of directors, separation of chairman and CEO, a code of conduct
and ethical standard for the board, the composition of the board, and the efficiency of
each board committees are essential to pay attention on, as these are vital variables to
determine good corporate governance that a firm has. Sound corporate governance in will
make the company sustains in the market longer.

Finally, focus on liquidity management to enhance the firm performance. Good

liquidity management enables the firm to convert assets to cash more efficiently and
therefore the firm is able to make investments from the cash on hand. However, the trend
of the current ratio of Axiata Company from 2011 to 2015 is decreasing. It indicates that
the portion firm’s current liability is getting larger compared to current assets. Therefore,
the company should pay attention to this as when the current ratio is low, which is lower
than 1, this might give influences to the company to meet its short term obligation. Policy
makers may develop some strategies and policies in order to strengthen liquidity
management of the firm.
5.0 Conclusion

In conclusion, as the current ratio which representing the liquidity ratio is the only
significant variable that related to Axiata Company profitability performance, it should be
managed effectively and efficiently in order to keep in control of their liquidity risk and
counterparty risk. Also, to make the company become sustainable, good corporate
government practices should be exercised in the firm although the statistics show that the
index score of corporate governance is insignificant to the company profitability.
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