• D/G to NEUTRAL from Buy, lower SOP TP of MYR3.25 (from MYR4.37), 10% upside. Axiata’s 1Q23 results were a miss. We see downside risks to earnings given the still challenging macro-environment in frontier markets, Linknet’s feeble earnings, and the group’s elevated interest expense. The deconsolidation of Celcom would also contribute to earnings dilution. We cut FY23-25F earnings by 13-26% with a 25% discount included into our SOP valuation to factor in earnings and execution risks. Our TP incorporates a 2% ESG premium as per our house methodology.

• 1Q23 results underwhelmed, with core PATAMI down 83% QoQ (-77% YoY) on comparable basis. This represents only 7% of our and consensus’ full-year estimates. The key deviations came from the higher-than- expected depreciation and financing costs, alongside weak showings at Dialog, Linknet, and edotco. The 15-35% depreciation of the BDT and LKR YTD further impacted translated revenues/EBITDA. Consolidated revenue was up 7.9% YoY in 1Q23, driven by all operating companies – except Dialog, Ncell, Robi, and ADA. It was the first quarter post the divestment of Celcom – now an associate via the group’s 33.1% stake in CelcomDigi (CDB MK, NEUTRAL, TP: MYR4.60). CDB’s share of profit of MYR114m in 1Q23 compares with Celcom’s MYR261.2m PATAMI in 1Q22.

• Dialog’s earnings to remain weak; Linknet losses expanded in 1Q23. Despite the mobile tariff hikes, electricity rates in Sri Lanka were raised by another 66% in Feb, the second time in less than a year. This impacted Dialog’s network costs, which alongside higher depreciation, saw 1Q23 EBIT decline 49.2%. Linknet’s (79.5%-owned) earnings continue to be hampered by high subs churn, depreciation, and finance costs, with EBIT down 84.7% YoY (-52% QoQ) while LAT widened to IDR49bn (4Q22: IDR6bn LAT; 1Q22: IDR238bn PAT).

• Resetting expectations. We cut FY23/24/25F core earnings by 26%/14%/13%, mainly to include the weaker earnings for Dialog, edotco, and Linknet, and extended digital losses, as well as after assuming higher depreciation and amortization, and finance costs. Post revision, we see Axiata’s core earnings fall 44% in FY23F before recovering in FY24F. With share price down 7% in the past three months and forward EV/EBITDA valuation at -1.5sd below historical mean, there could be downside support. Key risks: Competition, regulatory setbacks, and execution.

• ESG framework update. As there is greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 26 May 2023