Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM4.50/share, which implies an FY20F EV/EBITDA of 5.3x – 1 standard deviation below its 3-year average of 6x.
• While our FY21F–FY22F EBITDA forecasts are largely unchanged, Axiata’s FY20F net profit has been reduced by 29% mainly due to higher effective tax rate assumption of 40% vs. our earlier 28% and higher minority charges. We note that our earlier FY20F net profit was already 9% below consensus.
• Axiata’s 1HFY20 normalised net profit of RM166mil (excluding forex, XL tower sale gains and Celcom restructuring cost) disappointed expectations, accounting for only 22% of our FY20 net profit and 20% of consensus. As a comparison, 1H accounted for 39%–50% of FY17–FY19 normalised earnings. The group declared an interim dividend of 2 sen, translating to a 60% YoY drop from 5 sen in 1HFY19.
• Management has indicated that the worst impact of the Covid- 19 movement restrictions was felt in April 2020 with the group’s overall revenue rebounding to pre-pandemic levels in June this year (See Exhibit 6), with only Ncell, Robi and Smart still struggling to fully recover.
• QoQ, Axiata’s 2QFY20 underlying earnings dropped 63% to RM45mil in tandem with a 4% revenue contraction to RM5.8bil, largely dampened by weak contributions from Ncell, Celcom and Dialog.
• Celcom’s 2QFY20 revenue slid 7% QoQ to RM1.5bil due to the movement control order (MCO), mandated free data and weak prepaid market. Blended average revenue per user (ARPU) slid RM1/month QoQ to RM47/month while subscribers rose by 45K QoQ to 8mil. This is similar to Maxis’ trend which also gained prepaid subscribers while postpaid users decreased.
• Excluding tower sales gains, XL turned around from a RM25mil loss in 1QFY20 to a 2QFY20 normalised net profit of RM6mil, supported by a flattish 1% revenue rise and lower operational costs which expanded EBITDA margin by 2ppt QoQ to 51%
• Nepal-based Ncell’s 2QFY20 revenue dropped 25% QoQ from the Covid-19 lockdown, and the capacity constraints impacted by delayed spectrum assignments amid rising competition from fixed internet service providers. This led to core net profit decreasing by 86% QoQ.
• Sri Lanka-based Dialog’s 2QFY20 earnings halved QoQ on higher depreciation charges despite a flattish revenue trajectory as its subscriber increase of 185K to 56mil was mostly offset by ARPU decreasing by 8% QoQ.
• edotco’s 2QFY20 earnings decreased by 31% QoQ mainly from higher depreciation as its EBITDA expanded by 7% QoQ on a 1% increase in tenancies. Meanwhile, the group’s 68.7%-owned Robi registered a surprising 3.3x QoQ increase in earnings to RM20mil due to lower overall operating costs, depreciation and interest costs.
• For a regional telco operator with excellent opportunities to further monetise its assets and engage in merger and acquisition activities, Axiata currently trades at a bargain FY20F EV/EBITDA of 4.4x vs. Maxis' 12x. We will provide further details after the analyst briefing today

Source: AmInvest Research - 28 Aug 2020