• U/G to BUY from NEUTRAL, new MYR3.35 SOP TP from MYR2.78, 37% upside, c.4% yield. This follows the sharp 21% share price correction YTD and >30% upside to our revised TP, which now imputes a lower 20% discount (from 30%). We expect sequentially stronger 3Q23 EBITDA, supported by higher topline and stronger regional currencies. In our view, a meaningful re-rating could come from better clarity on its asset delayering and/or monetisation exercise and earnings tailwinds in FY24F. Our TP includes a 2% ESG premium.

• Expectations at low ebb. We note that Street’s FY23/24F core earnings have been slashed by 40-60% since the start of the year, with Axiata posting two successive quarters of earnings disappointments. The deconsolidation of Celcom in Dec 2022 (now a 33.1% share of CelcomDigi (CDB MK, NEUTRAL, TP: MYR4.60) has compounded the earnings slack with higher depreciation and financing costs from asset purchases crimping the bottomline. Nonetheless, with expectations at the low ebb, the inexpensive valuation (4.7x FY24 EV/EBITDA) at 2SD below the historical 5-year mean, and decent 4% dividend yield, the stock’s risk-reward is tilted on the upside.

• Elevated financing cost a recurring concern. Group net gearing and net debt/EBITDA stood at 1.0x and 3.1x at end-2Q23. Much of the balance sheet concerns can be attributed to FY22’s big-ticket debt-funded acquisitions – the MYR2.6bn buyout of Indonesia’s fixed broadband operator Link Net, and edotCo’s purchase of PLDT’s towers in the Philippines for USD800m (c.MYR3.4bn). The USD strength (higher for longer narrative) has renewed concerns on financing risks, with c.58% of the group’s MY26bn debt denominated in USD (c.40% is hedged). Of the USD debt, c. USD2.5bn sits at the holdco level while the remainder is split among edotCo (c.USD500m), Dialog (c.USD130m) and Robi (c.USD85m).

• Mixed bag showing expected for 3Q23; more clarity on transformation plan on 6 Dec. Axiata is slated to announce 3Q/9M23 results on 29 Nov, followed by an earnings call. We expect sequentially stronger core EBITDA, supported by Dialog’s cost-rescaling efforts, higher tenancies at edotCo, XL Axiata’s (EXCL IJ, BUY, TP: IDR3140) data re-pricing, and stronger regional currencies. An update on its strategic blueprint (Axiata 5.0) and the progress of its asset delayering and/or monetisation plans is expected at the Annual Investor Day (AID2023) on 6 Dec. Key areas of interest include the structural separation of its Indonesian OpCos into a NetCo (Link Net) and RetailCo (EXCL) to expedite fixed-mobile convergence (FMC), value illumination of its digital assets, and digital banking.

• Key risks: Competition, weaker-than-expected economic recovery in frontier markets, earnings misses, and regulatory setbacks.

Source: RHB Securities Research - 17 Nov 2023