Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with a lowered sum-of-parts-based fair value of RM4.90/share (from an earlier RM5.00/share) which implies an FY20F EV/EBITDA of 5.5x – 1 standard deviation below its 3-year average of 6.2x.

• While we have lowered the group’s FY19F earnings by 11%, our assumptions remain largely unchanged for FY20F–FY21F on expectations of stronger contributions from XL, Robi and edotco, plus improving cost efficiencies and lower interest costs following the disposals of minority stakes in M1 and Vodafone Idea, together with non-core digital operations.

• Axiata’s 9MFY19 underlying net profit of RM733mil came in below expectations, accounting for 60% of our earlier FY19F estimates and 68% of consensus. As a comparison over the past 5 years, Axiata’s 9M core earnings has accounted for a wide range of 60%–95% to their full financial years due to the volatility of the group’s multiple regional operations and one-off impairments. However, a more normalised 9M earnings tend to range from 79% to 81% as 4Q tend to be weaker due to rampedup year-end spending patterns regionally. Axiata did not declare any 3QFY19 dividend as expected.

• As management expects to outperform its FY19F EBITDA growth guidance of 5%–8% and ROIC of 5.2%–5.6% while missing revenue growth target of 3%–4%, this improvement will be driven largely by cost reductions in network expansion/cost, sales/marketing and staff. This is reflective of the group’s expectations that its capex may come in below its guidance of RM6.8bil, of which 9MFY19 spending of RM4.4bil accounts for only 65%.

• QoQ, Axiata’s 3QFY19 underlying earnings was flattish at RM254mil in tandem with a tepid 1% increase to RM6.2bil as improving contributions from Robi and edotco were mostly offset by NCELL, impacted by new consumption levies, and tight competition on Celcom.

• Celcom’s 3QFY19 revenue was flattish QoQ at RM1.7bil YoY, impacted by lower domestic roaming prices as subscribers declined by 172K subscribers (-9% YoY) to 8.8mil, partly offset by average revenue per user (ARPU) improving by RM1/month QoQ to RM52/month.

• The net subscribers for Celcom’s postpaid segment have fallen by 30K QoQ to 3mil, even though they are still up 90K YoY. This is still a distant third position as Maxis retains its postpaid pole position with a net YoY addition of 476K vs. Digi’s 263K. Together with a 22% increase in direct expenses, Celcom’s 3QFY19 normalised net profit slid 14% QoQ to RM195mil.

Source: AmInvest Research - 29 Nov 2019