Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with a higher sum-of-parts-based fair value of RM6.60/share (from an earlier RM6.40/share), which translates to a FY19F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel). Our valuation is premised on a potential value-enhancing re-merger with TM which could reduce the valuation differential with its peers and re-energise its earnings prospects.

• Axiata’s FY18F-FY19F earnings have been raised by 6%-10% on higher revenue and margin assumptions from the Sri Lankan operations as its FY17 normalised net profit of RM1,205mil came in 13% above our forecast, albeit 6% below street’s. Our raised earnings forecasts are now closer in line with the group’s FY18F ROCE guidance of 4.5%-5%, 14% capex increase to RM7.4bil and revenue growth of 6.3%. The group also announced a final dividend of 3.5 sen, which brings FY17 dividend to 8.5 sen, translating to a payout ratio of 64% and 0.5 sen above our forecast.

• We highlight that the group will be providing a RM1.2bilRM1.8bil non-cash impairment upon completion of the impending Idea-Vodafone merger by 1HFY18, which could translate to a FY18F loss. Although this will cut the carrying value of its 18%-owned stake in Idea by 30% to RM4.5bil, we note that it should not have any substantive impact to the group’s FY18F normalised earnings, which excludes provisions.

• Axiata’s 4QFY17 normalised net profit slid 41% QoQ to RM209mil due to 18%-owned Idea’s RM159mil loss, an appreciating ringgit and a 32%-point surge in effective tax rate to 75% due to Idea’s non-deductible losses and lower deferred write-backs.

• Celcom’s 4QFY17 normalised net profit rose 5% QoQ to RM253mil in tandem with service revenue growth of 7%, supported by a RM2/month increase in blended average revenue per user (ARPU) to RM48/month, which was largely driven by a RM3/month improvement in the post-paid segment to RM87/month.

• Nevertheless, Celcom lost 120K net subscribers QoQ, of which 66% stemmed from the prepaid segment. Since 4Q2015, Celcom has lost 2.7mil subscribers vs 1.4mil for Maxis and 378k for Digi. More importantly, its higher value postpaid segment still appears to be struggling to gain traction as its base contracted by 41k QoQ while Digi increased by 85k and Maxis by 45k. Since 4Q2016, Celcom’s postpaid subsribers are down 138k vs Digi increasing by 381k and Maxis by 136k. Hence, we remain cautious on a substantive recovery in Celcom’s earnings for this year given the intense post-paid competition spearheaded by Digi and U Mobile.

• XL’s transformation drive, which has significantly improved its data growth trajectory, has led to a QoQ doubling in normalised earnings to RM63mil in 4QFY17. This was driven by a 1mil increase in subscriber base to 53.5mil, partly offset by a IDR1k/month decline in blended ARPU to IDR34k/month.

• While Nepal-based NCELL’s earnings rose 20% QoQ due to a 5% increase in revenue and 6% decline in operating expenses, its international long distance segment is expected to remain under pressure from intense price competition as consumers switch to data-based connectivity. The Bangladesh-based Robi-AirTel merged entity registered a 7% decline in 4QFY17 normalised loss to RM13mil, supported by a 7% increase in revenue as subscribers rose by 1.7mil to 42.9mil. Sri-Lanka-based Dialog’s earnings fell 16% due to higher marketing expenses and one-off provisions.

• 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 - 23 Feb 2018