Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.30/share on expectations of a value-enhancing re-merger with TM which could reduce the valuation differential with its peers.

• Axiata’s FY17F-FY19F earnings are maintained as its 62%- owned edotco Group’s proposed investment in a 55% equity stake in an enlarged edotco Pakistan’s portfolio of 13,700 towers for US$174mil (RM745mil) cash is expected to raise FY18F net profit by less than 1%.

• Nevertheless, we are mildly positive on the group’s JV with Pakistan-listed conglomerate Dawood Hercules Corp as the tower expansion provides a larger footprint at a reasonable EV/EBITDA of 8x, lower than India’s Bharti Infratel’s 11x and much lower than over 20x for US-based tower companies.

• Scheduled to be completed in 4Q2017, we expect the balance sheet impact to be marginal as our FY18F net debt/EBITDA will be largely unchanged at 1.5x. However, edotco’s global ranking based on towers under management will leapfrog from 12 to 8 (see Exhibit 5), expanding the group’s towers (operated and managed) by 52% to 40,000.

• Separately, Axiata’s 1HFY17 normalised net profit of RM644mil generally came in line with expectations, accounting for 56% of our earlier FY17F net profit but 46% of consensus. As a comparison, 1H accounted for a higher proportion of 55%-59% of FY14-FY16 normalised earnings.

• Axiata’s 2QFY17 normalised net profit rose by 21% QoQ largely due to one-off deferred tax write-back of RM100mil for the Robi-Airtel entity and Celcom’s RM40mil asset disposal of an associate, supported by improved performance from NCELL and XL Axiata.

• Celcom’s 2QFY17 normalised net profit rose 13% QoQ to RM216mil on flat revenues, supported by the one-off associate disposal gain and a 3% decline in operational costs.

• Celcom managed to register a 1% sequential service revenue growth despite losing 317K net subscribers, falling below the 10mil threshold as the group continued to clear dormant users. Since 4Q2014, Celcom has lost 3mil or 23% of its subscribers.

• However, we note that Celcom’s blended ARPU continued to improve, rising RM1/month to RM34/month, driven primarily by its postpaid segment. We still 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 led to an improved bottom line with a 71% drop in 2Q17 loss to only RM6mil. Nepal-based NCELL’s earnings rose 31% QoQ due to strong data growth of 12% amid lower depreciation and amortisation charges.

• The Bangladesh-based Robi-AirTel merged entity, which is expected to register losses for the next 2 years, surprisingly turned around to a 2QFY17 normalised net profit of RM30mil, which largely stemmed from a one-off deferred tax adjustment from the merger.

• Amongst the group, the only QoQ bottom line deterioration came from Cambodia-based SMART (-21% QoQ) due to intense competition.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8.1x vs SingTel’s 14x.

Source: AmInvest Research - 5 Sept 2017