Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) but with a lower sum-of-parts-based fair value of RM4.50/share (from an earlier RM4.90/share), which implies an FY20F EV/EBITDA of 5.3x – 1 standard deviation below its 3-year average of 6x.

• We have cut Axiata’s FY20F-FY22F earnings by 31%-47% on higher depreciation charges, driven by IFRS 16 lease accounting standards, and lower Nepal-based Ncell revenue assumptions.

• Axiata’s 1QFY20 normalised net profit of RM121mil (excluding forex, XL tower sale gains and Celcom restructuring cost) disappointed expectations, accounting for only 9% of our FY20 net profit and 11% of consensus. As a comparison, 1Q accounted for 18%–26% of FY17–FY19 normalised earnings. The group did not declare any interim dividend, as expected.

• Against the uncertain impact of Covid-19 on regional prepaid revenues, costs, enterprises and small businesses which will have a more pronounced impact in 2QFY20, management has withdrawn its earlier FY20F guidance which had expected EBITDA growth of 4%–5.5% and revenue growth of 3.5%–4%.

• YoY, Axiata’s 1QFY20 underlying earnings dropped 58% to RM121mil despite a tepid 2% revenue increase to RM6bil largely due to lease accounting-fuelled depreciation increase of 13% to RM1.8bil and a 43% drop in wholly-owned Ncell’s earnings.

• Celcom’s 1QFY20 revenue slid 6% YoY to RM1.6bil QoQ but was lower by 10% YoY, due to slow IT-constrained product launches which caused a contraction in subscribers and a RM5/month QoQ reduction in blended average revenue per user (ARPU).

• The net subscribers for Celcom’s postpaid segment have fallen by 22K QoQ to 2.9mil despite Maxis’ rising by 78K and Digi’s by 68K. Excluding a one-off employee restructuring cost of RM77mil, this largely caused Celcom’s normalised FY19 earnings to decrease by 29% to RM177mil.

• XL’s prospects remain bright from higher postpaid subscriber growth and upselling strategies as its 1QFY20 revenue rose 9% YoY while EBITDA climbed on a faster 11% growth, which caused a 58% increase in normalised net profit (excluding tower sales gain).

• Nepal-based Ncell’s 1QFY20 revenue slid 15% YoY from the capacity constraints impacted by delayed spectrum assignments amid rising competition from fixed internet service providers, leading to core net profit decreasing by 43% YoY.

• However, we are glad that Ncell will not be making any further provisions from its recent settlement of NPR23.4bil (RM834mil) outstanding capital gains tax to Sri Lanka’s Large Taxpayers Office as full provisions were already made last year.

Source: AmInvest Research - 21 May 2020