Investment Highlights

• Maintain HOLD recommendation on Axiata Group (Axiata)  with a lower SOP-based fair value (FV) of RM3.10/share  (from RM3.40/share). This implies FY23F EV/EBITDA of  5.4x, in line with its 5-year average of 5x. Our FV reflects a  neutral 3-star ESG rating.

• We slashed FY23F-FY25F earnings by 35% after Axiata’s  1QFY23 results fell short of expectations. The group’s core earnings of RM168mil account for only 11% of our previous  full year FY23F net profit and 14% of consensus. The  deviation stemmed from underperformance of XL Axiata,  Dialog and Ncell.

• Our 1QFY23 one-off adjustments include RM85mil  accelerated depreciation from revision of assets’ useful  life and site rationalisation at CelcomDigi.

• 1QFY23 normalised PATAMI declined 55% YoY dragged by  Dialog and Link Net losses as well as poor edotCo  performance. This was also exacerbated by the weakening  of frontier market currencies vs. RM which resulted in  negative translation impact to the group’s profitability. The  share of CelcomDigi results during the quarter was also  lower than Celcom’s PATAMI contribution in 1Q22. 

• QoQ on basis, 1QFY23 core profit declined 67%, following  the decline in group’s revenue (-8% QoQ) and spike up in  the net interest cost (+5x QoQ). At OpCos level, Dialog (- RM2mil), Ncell (-60% QoQ) and Link Net (losses widen to  RM15mil from RM2mil) were the underperformers.

• Moving forward, we remain cautious on the company’s  prospects due to macro headwinds that could potentially  derail its frontier markets’ performance. The group’s  financial performance is also susceptible to rising interest  rate environment due to its highly leveraged FY23F net  debt/EBITDA of 1.8x. 

• Affordability pressure experienced by end-consumers due  to the inflationary environment also may cap revenue  growth potential.

• From a valuation perspective, the stock looks fairly valued  trading at 4.6x EV/EBITDA compared to its 5-year historical  average of 5x, especially given potential downside risks

Source: AmInvest Research - 26 May 2023