Investment Highlights

• We maintain HOLD on Axiata Group (Axiata) with a lower SOP-based fair value (FV) of RM2.23/share (vs. RM2.80/share previously). Our fair value implies FY24F EV/EBITDA of 4.0x, which is 1 standard deviation below its 5-year average of 5x. Our FV reflects a neutral 3-star ESG rating.

• Axiata’s 9MFY23 core net profit (CNP) of RM255mil was below expectations as it accounted only for 32% of our earlier FY23F earnings and 52% of street’s. Hence, we cut our earnings for FY23F-25F by 50%-58% to account for higher-than-expected finance cost, depreciation/ amortisation and loss of revenue from Ncell in Nepal.

• Axiata’s 9MFY23 core net profit (CNP) declined by 76% from RM1,077mil in 9MFY22 as revenue fell by 13% YoY to RM16.4bil in 9MFY23 due to lower contribution from Celcom Axiata and loss of Ncell. Axiata announced their plan to exit the Nepal mobile market as the outlook for the telco industry in the country is poor. The divestment of Ncell is expected to be completed in 2HFY24. Axiata was also affected by a 1% YoY increase in net interest expense resulting from the expansion of Link Net, XL Axiata and edotco.

• XL Axiata was the largest contributor to bottomline, accounting for 55% of 9MFY23 core earnings. XL Axiata’s revenue increased by 8% YoY in 9MFY23 driven by higher contribution from data and digital services. We expect XL Axiata to improve bundled offerings with synergies from Link Net. Link Net will continue to roll-out its fibre offerings to achieve 1mil target subscribers by mid-FY24F from 755k currently.

• On sequential basis, CNP increased by 3x from RM44mil in 2QFY23 to RM128mil in 3QFY23, mainly driven by a 31% reduction in depreciation and 46% decrease in net interest expenses.

• Going forward however, we are cautious as the group’s finance cost would increase due to debt financing for the rollout of Link Net fibre, the digital banking start-up losses and capex expansion of Edotco in Phillipines.

• Valuation-wise, even though Axiata’s EV/EBITDA of 4x is below its 5-year historical average of 5x, we reckon that this is fair due to the potential downside earnings risks from further impairments from the group’s Ncell investments.

Source: AmInvest Research - 30 Nov 2023