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 5x – 1 standard deviation below its 3-year average of 6x.

• We have raised our FY20F–FY22F earnings by 8%–48% on a 2 ppt increase in Celcom’s FY20F subscriber growth as well as a 5% cut in overall operating cost assumptions. This is in tandem with management guidance of a low single-digit FY20F decline in revenue and EBITDA amid a potentially softer 4QFY20 against the backdrop of re-emerging Covid-19 restrictions and heightened competition,

• Axiata’s 9MFY20 normalised net profit of RM544mil (excluding forex, XL tower sale gain and Celcom restructuring cost) exceeded expectations, already surpassing our earlier full-year estimate and 85% of street’s. As a comparison, 9M accounted for 60%–81% of FY17–FY19 normalised earnings. The group did not declare any interim dividend as expected.

• QoQ, Axiata’s 3QFY20 underlying PATAMI surged 7.9x to RM374mil, mainly driven by a 5.5% revenue increase to RM6.1bil from all regions. However, we note that the main revenue driver is Celcom, which accounted for 41% of the group’s revenue growth.

• Celcom’s 3QFY20 revenue rose 9% QoQ to RM1.6bil as its subscribers increased 373K to 8.4mil, mostly driven by the prepaid segment (+339K) and to a lesser extent, the postpaid division (+32K). Partly augmented by a RM1/month increase in average revenue per user (ARPU) to RM48/month, this highlights a turnaround from a weak 2QFY20 due to the movement control order (MCO), mandated free data and weak prepaid market. We note that this QoQ improvement is similar to Digi’s 3Q results as opposed to Maxis’ contraction in both prepaid and postpaid users.

• XL has also registered an impressive 3QFY20 PATAMI jump of 7.7x QoQ from a 5% revenue increase together with a lower direct and network expenses, translating to a 1 ppt rise in EBITDA margin. This was driven by a 1.2mil increase in subscribers to 57mil, partly offset by a IDR1K/month reduction in ARPU to IDR36K/month.

• Nepal-based Ncell’s 3QFY20 PATAMI expanded 4.2x QoQ to RM42mil on a 9% revenue increase. This is despite capacity constraints impacted by delayed spectrum assignments and rising competition from fixed internet service providers which caused its subscribers to drop by 590K to 15.3mil. This was partly offset by a 12% QoQ increase in 3QFY20 ARPU.

• Sri Lanka-based Dialog’s 3QFY20 earnings rose 3.2x QoQ to RM89mil on a 7% increase in revenue, supported by subscriber increasing by 249K to 15mil and ARPU growth of 10%.

• Cambodia-based SMART’s 3QFY20 PATAMI growth was slower at 6% QoQ while revenue increased at a similar rate as the operation was not as badly impacted by the country’s Covid-19 restrictions. Meanwhile, edotco’s 3QFY20 earnings climbed by 45% QoQ to RM42mil mainly from lower depreciation as its EBITDA decreased by 4% QoQ on higher operating costs and bad debt provisions.

• The only regional division which recorded a QoQ PATAMI decline was 68.7%-owned Robi in Bangladesh, which decreased by 35% due to higher operating costs despite its revenue rising by 10% on net gain of 2.1mil subscribers and 8% ARPU expansion.

• For a regional telco operator aiming to be a high dividend-yielding stock with excellent opportunities to further monetise its assets and engage in merger and acquisition activities, Axiata currently trades at a bargain FY21F EV/EBITDA of 3.9x vs. Maxis' 12x. We expect greater clarity on the group’s strategy from the Axiata “Analyst and Investor Day” online conference next week.

Source: AmInvest Research - 27 Nov 2020