Axiata Group (Axiata) posted a net loss of RM43m for 1QFY22 against a net profit of RM75.6m in 1QFY21. This was mainly due to foreign exchange (FX) losses of RM476.9m, largely incurred by its mobile operations in Sri Lanka. Out of the total FX losses, RM462.5m are unrealised losses however. Stripping out non-core items, normalised 1QFY22 net profit was at RM370m, slightly above our and market estimates at 31% of full-year forecast. We maintain our FY22-24F earnings forecasts for now. However, we are concerned over potential operational and investment risk in Sri Lanka and Nepal and as such, are ascribing a 20% discount to our SOTP valuation to derive a new TP of RM3.60. Maintain Neutral on Axiata.

• 1QFY22 revenue grew by 6.7% YoY, mainly driven by stronger contribution from Indonesia (+10% YoY) due to higher data revenue, growth in digital business and higher device sales. Cambodia also posted a 9.5% increase in revenue, driven by higher data revenue and growth in prepaid business. Infrastructure segment also delivered higher revenue (+19.1% YoY) due to organic growth and contribution from new acquisition of Touch Mindscape Group in Malaysia. Meanwhile, Malaysia posted a flattish growth of 1% YoY as the increase in subscriber base of 6.5% YoY was offset by a decline in ARPU (-4.4% YoY).

• Headline loss, though normalised 1QFY22 net profit up by 69.4% YoY due to stronger contribution from Celcom on the back of lower operating expenses and depreciation & amortisation cost. In 1QFY21, Celcom’s performance was dragged by accelerated depreciation of 3G assets amounting to RM122.7m. As for headline 1QFY22 net loss of RM43m, this was mainly due to FX losses of RM476.9m, out of which 81% came from the Sri Lanka operations owing to its exposure to USD denominated loans and liabilities.

• Outlook. While we are positive on Axiata’s recent acquisitions in Indonesia and the Philippines that should enable the group to diversify into high-growth emerging markets, they are not likely to contribute to higher earnings in the near-term due to higher financing cost and depreciation charges. Meanwhile, we remain wary of its operations in Sri Lanka and Nepal. We expect further downside risk in terms of FX translation losses and provisions. Back home, the timeline for the rollout of 5G network remains uncertain with the four largest players (including Celcom) now seeking a majority stake in the country’s 5G agency, Digital Nasional Bhd. The justification for a controlling stake is to enable the telco providers to exercise their influence in order to safeguard their investment in 5G. Meanwhile, it remains to be seen whether the proposed merger between Celcom and Digi.Com would materialise, following the delay in its completion date due to concerns raised by the regulator with regards to post-merger market competition.

Source: PublicInvest Research - 26 May 2022