Investment Highlights

• Maintain HOLD recommendation on Axiata Group (Axiata) with a lower SOP-based fair value (FV) of RM3.04/share (from RM3.10/share). This implies FY24F EV/EBITDA of 4.3x, 1 standard deviation below its 5-year average of 5x. Our FV reflects a neutral 3-star ESG rating.

• We slashed FY23F-FY25F core earnings by 17% as Axiata’s 1HFY23 results fell short of expectations. The group’s underlying earnings of RM127mil account for only 13% of our previous FY23F net profit and 14% of consensus. The deviation stemmed from underperformance of ADA and Ncell.

• 1HFY23 normalised PATAMI declined 82% YoY, dragged by higher depreciation and amortisation from XL, Link Net and EDOTCO, with overall higher net finance cost and lower associate share of CelcomDigi’s results vs. Celcom’s previous contribution as a subsidiary. The profitability is also affected by higher interest rates and debt raised for acquisitions made in the previous year.

• QoQ, group 2QFY23 revenue increased by 11% to RM6bil, driven by higher contribution from all OpCos except in digital business (Boost). However, a 42% increase in net interest expenses for all OpCos, including higher net finance cost from additional drawdown on borrowings for Link Net and high start-up cost for Digibank caused 2QFY23 normalised PATAMI to drop by 47% QoQ.

• 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 1.9x.

• Affordability pressures 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 4x EV/EBITDA vs. its 5-year historical average of 5x, especially given potential downside risks.

Source: AmInvest Research - 30 Aug 2023