Axiata Group (Axiata) announced that its wholly-owned subsidiary, Axiata Investments UK, and 80%-owned Ncell Axiata’s claims against the government of Nepal has been dismissed by the International Centre for Settlement of Investment Disputes. This means that Axiata’s statement of comprehensive income would be adjusted by approximately RM376.6m arising from the write-off of related receivable assets. Despite the strong potential growth of the emerging markets, we had highlighted our concern of regulatory and investment risks attached to Axiata’s aggressive diversifications that could lead to further impairments in the future. Following its disposal of Celcom, which had been a strong income as well as cashflow generator of the group, we see little avenue for Axiata to compensate for this loss in the near term. We make no changes to our core earnings forecast as this write-off will be treated as one-off and has no cashflow impact. We believe our FY23F earnings forecast of RM508m, which comes in 42% below consensus, is conservative and fair. Although share price has fallen by about 10% since our downgrade on 26 May, we reiterate our Underperform rating with an unchanged TP of RM2.40.

• Recap. In December 2015, Axiata purchased 80% of Nepal’s largest mobile operator, Ncell, from TeliaSonera Norway for USD1.37bn (or RM5.88bn). Due to some capital gain tax dispute by TeliaSonera Norway, the Supreme Court of Nepal adjudged that Ncell was liable to pay NPR21.1bn (approx. RM738.4m) in outstanding taxes. Ncell subsequently settled the demand but argued that the imposition of capital gain tax by Nepal was unlawful and pursued legal action in the international arbitration proceedings, which has now been dismissed.

• Financial impact. In view of the unfavourable outcome of the case, Axiata will adjust its statement of comprehensive income by RM376.6m arising from the write-off of related receivable assets. Although no cashflow impact is expected from this outcome, we do not rule out the possibility of further asset impairments going forward. We maintain our conservative FY23F earnings forecast of RM508m, which is 42% below market estimates.

• High-risk attached to investment in emerging markets. Over the years, Axiata’s aggressive expansions have enabled it to diversify into several high-growth emerging markets. However, we believe they are not likely to make significant contribution to the group’s bottomline in the near future, due to the sizeable funding requirement in an environment of rising interest rates as well as accelerating depreciation charges. In addition, we see challenges for Axiata to expand customer base and market share as it faces stiff competition from the incumbents. Given lofty investment costs, we are also concerned of further impairment risks.

Source: PublicInvest Research - 13 Jun 2023