Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of 6.30/share, on expectations of a value-enhancing re-merger with TM which could reduce the valuation differential with its peers.

• In our view, the need for consolidation is further underpinned by the persistently weak operational performance of the group’s wholly-owned Celcom together with a large segment of its overseas activities, which are faced with intensifying competition.

• Our FY17F-FY19F earnings have been reduced by 13%-18% on lower assumptions for Celcom subscribers, which have declined by 3mil over the past 3 years to 10.6mil currently, below 11.8mil for both Maxis and Digi. Following our cuts, our net profit forecasts are now 23%-29% below consensus.

• Axiata’s 1QFY17 normalised net profit of RM291mil came in below expectations, accounting for 20% of our earlier FY17F net profit and 19% of consensus. As a comparison, 1Q accounted for a higher proportion of 25%-33% of FY14-FY16 normalised earnings.

• Even though there is a likelihood for lower losses from XL, Robi and Idea Cellular, Axiata’s earnings clarity is challenged by overall competitive pressures amid regulatory uncertainties in Nepal’s termination call rate changes, new Sri Lankan taxes and Bangladesh’s additional costs for technology neutrality.

• Additionally, there could be further asset portfolio rebalancing, as Vodafone’s proposed merger with Axiata’s 19.8%-owned Idea Cellular in India could lead to a non-strategic stake of 10%. The group’s review of its 28.5% stake in SGX-listed M1 is expected to be concluded in 3QFY17.

• Axiata’s FY16 normalised net profit decreased by 37% YoY due to Celcom’s weak operational performance, Dialog-AirTel merger losses, Idea losses in India and lower M1 earnings.

• Celcom’s 1QFY17 normalised net profit declined 7% QoQ to RM191mil in tandem with a 2% revenue contraction, losing 310K net subscribers (vs. a 80K reduction in 4QFY16) as the group continued to clear dormant users.

• Celcom’s 1QFY17 net subscriber loss of 598K was higher than Digi’s 523K and significantly worse than Maxis’ 118K. As Celcom’s average revenue per user (ARPU) was flat QoQ at RM43/month, postpaid subscribers slid 14K in 1QFY17 vs. an initial gain of 91K in 4QFY16. We do not expect any significant recovery in Celcom’s earnings for this year given the intense pre-paid competition spearheaded by Digi and U Mobile.

• XL’s transformation drive, which has significantly improved its data growth trajectory, has yet to demonstrate an earnings recovery for the group even though XL’s normalised loss fell 61% QoQ to RM21mil. Nepal-based NCELL’s earnings fell 24% QoQ due to aggressive market pricing and lower interconnection revenue. The Bangladesh-based Robi-AirTel merged entity, which halved its 1QFY17 normalised loss QoQ to RM59mil, is still expected to remain in the red over the next 2 years.

• Amongst the group, the only earnings improvement came from Sri Lanka’s Dialog (+11% QoQ) and Cambodia-based SMART (+63% QoQ). However, Axiata may be selling its equity stake in SMART by up to 20% to 72.5% next year, potentially diluting its future earnings impact.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, way below its 2-year average of 8.1x vs SingTel’s 14x.

Source: AmInvest Research - 26 May 2017