In the absence of a significant earnings contribution from Celcom as its subsidiary, Axiata Group (Axiata) continued to deliver disappointing results. New acquisitions made after the disposal of Celcom have failed to generate sufficient earnings to cushion the impact of rising operating costs. The group posted an 86.7% YoY drop in normalised net profit to RM44.1m on the back of lower share of profit from CelcomDigi, higher depreciation and finance costs and higher losses for its digital business. Cumulative 1HFY23 normalised earnings of RM127.3m only accounted for 25% and 14% of our and consensus full-year forecasts respectively. As such, we cut our FY23-25F forecasts by an average of 16.7% after factoring in higher depreciation and finance costs. Consequently, we revise down our SOTP-based TP to RM2.20 (RM2.40 previously). Although share price has fallen by about 13% since our downgrade in May, we continue to rate the stock Underperform given the uncertainties of its operations in the emerging markets. Note that the group has written off capital gains tax (CGT) related receivables of RM396.1m in the current quarter. Meanwhile, a first interim dividend of 5.0sen was declared.

• 2QFY23 revenue rose 15.3% YoY, mainly driven by contribution from XL (Indonesia), Robi (Bangladesh) and the newly-acquired businesses i.e. Link Net and tower business. However, this was partly offset by weaker revenue from Ncell (Nepal) and digital business.

• Normalised net profit of only RM44.1m in 2QFY23. Axiata suffered a headline net loss of RM978.2m in 2QFY23, mainly due to higher depreciation cost (+65.8% YoY), higher finance cost (+68.5% YoY), impairment of assets in Nepal and write-off of CGT-related receivables of RM396.1m following the unfavourable outcome of the arbitration proceedings in June 2023. Stripping out non-operating items, normalised net profit was down 86.7% YoY due to lower share of results of CelcomDigi as well as higher depreciation and finance cost.

• Outlook. Axiata’s expansion in Indonesia and the Philippines has enabled the Group to diversify into high-growth emerging markets. However, we believe they are not likely to make meaningful earnings contribution in the near term, due to the sizeable funding requirement of the acquisitions. In addition, we see challenges for Axiata to expand its customer base and market share as it faces stiff competition from the incumbents. Given lofty investment costs, we are also concerned of impairment risks in the distant future, judging from its past ventures into high growth markets such as Nepal, Sri Lanka and India.

Source: PublicInvest Research - 30 Aug 2023