Investment Highlights

• We maintain our HOLD call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM3.86/share, which is at a 25% holding company discount to our sum-of-parts of RM5.14/share. This implies an FY19F EV/EBITDA of 5x, 2 SDs below its 3-year average of 7x.

• Our FY19F-FY20F earnings have been fine-tuned as FY18 normalised net profit of RM1,190mil (pre-MFRS 15 and forex translation losses) came in within our expectations. This excludes one-off non-cash write-offs of RM6.3bil comprising RM3.9bil impairment from the deconsolidation of India-based Idea from group accounts, RM1.8bil asset impairments, and RM0.5bil forex and derivative losses, which we have forewarned in our earlier updates. The results are not comparable with consensus, which is skewed by an inclusion of these write-offs.

• Axiata declared a final dividend of 4.5 sen, which raised FY18 DPS by 1 sen YoY to 9.5 sen, translating to a payout ratio of 85% if measured against normalised earnings (including MFRS 15 and forex losses) of RM1.01bil. Going forward, management has set a higher FY19F EBITDA growth of 5%–8% and 11% increase in capex to RM6.8bil vs. a slower revenue increase of 3%–4%, while reaffirming a dividend payout ratio of 85%. This is in line with its FY15 distribution prior to a cash-conservation need following spectrum payments for Celcom’s 1800MWHz and 900MHz bands.

• Although Axiata’s 4QFY18 revenue rose 4% largely from its overseas operations, normalised net profit fell 32% QoQ to RM218mil due to higher Idea losses and lower contributions from Celcom (-39%) and Dialog (-5%), which surpassed gains from NCell (+22%) and Smart (+12%) and Robi’s lower losses (-27%).

• Celcom’s 4QFY18 revenue was flat QoQ as subscribers declined by 470K to 9.1mil, mostly offset by average revenue per user rising by RM3/month to RM52/month. Similar to the trends shown by Digi and Maxis, Celcom has cushioned the impact of prepaid attrition by expanding its higher value postpaid subscribers, which have grown by 102K vs. a prepaid decline of 256K. However, Celcom’s 4QFY18 normalised net profit fell 39% QoQ to RM146mil due to higher depreciation and tax charges.

• XL’s prospects are brightening as its 4QFY18 loss improved slightly to RM23mil on a 3% revenue increase, driven by its subscriber base increasing by 1mil QoQ to 54.9mil following the pre-paid SIM registration exercise in 2QFY18.

• Nepal-based NCELL’s 4QFY18 revenue slid 2% QoQ as its domestic data business declined to 22% of income from 24% in 3QFY18. However, its core earnings rose 22% QoQ to RM158mil due to lower one-off expenses.

• Sri Lanka-based Dialog’s 4QFY19 normalised net profit slid 5% QoQ to RM73mil despite a growing subscriber base (+423K) and 2% revenue growth. This stemmed from higher depreciation and network costs. Cambodia-based SMART net profit rose 12% QoQ to RM60mil on stronger data-driven revenue growth notwithstanding higher regulatory costs.

• Management was unable to provide clarity on Nepal’s additional capital gains tax charge on NCell acquisition as the Supreme Court has yet to deliver its judgement. Hence, even though Axiata currently trades at a bargain FY18F EV/EBITDA of 5x, way below Digi’s 12x, the group’s unmitigated overseas risk profile amid intense competition from local and overseas mobile operations caps its upside momentum. Additionally, the government’s intention to reduce Khazanah Nasional’s GLC holdings casts possibilities of a share overhang over the medium term.

Source: AmInvest Research - 25 Feb 2019