Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.60/share, which translates to an 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 forecasts are maintained as 1QFY18 normalised net profit of RM200mil (pre-MFRS 15), which excludes RM358mil loss from the dilution of Idea’s stake from 20% to 16%, was generally in line with expectations even though it accounted for 17% of our FY18F earnings and 14% of consensus. For now, we adhere to management’s unchanged guidance for an FY18F EBITDA growth of 5.8% based on constant currency.

• As a comparison, 1QFY15-1QFY17 accounted for 25%-26% of their respective years. While Axiata did not declare any interim dividend as expected, management affirmed that FY18F payout will normalise and match FY15, before the group drastically cut its distribution following FY16 spectrum fee outlays.

• Even though Axiata will be providing a RM2bil-RM3bil non-cash impairment upon completion of the delayed Idea-Vodafone merger, this will be a non-cash item which will be excluded from the group’s normalised earnings. On a positive note, the halving of Axiata’s stake in Idea to 8% will remove its persistent losses, driven by India’s hyper-competition, from the group.

• Axiata’s 1QFY18 normalised net profit slid 4% QoQ due to lower working days in the quarter which largely impacted Celcom, together with one-off network expenses. This was exacerbated by adverse prepaid SIM registration on XL’s revenues together with the strengthening of the ringgit against the overseas contributions of Dialog, Robi, Smart and NCELL.

• Celcom’s 1QFY18 normalised net profit fell 27% QoQ due to the lower seasonal revenue and one-off costs as blended average revenue per user (ARPU) was largely flat at RM47/month.

• Celcom’s earnings trajectory may be turning a corner as it has reversed its decimation in subscribers since 1Q2016 by gaining 51K net subscribers QoQ to 9.6mil, of which 92% stemmed from the prepaid segment on the back of improved sales distribution and simplified product offerings. This is a relief as Celcom has lost 2.7mil subscribers vs. 1mil for Maxis and 368K for Digi since 4Q2015.

• Notwithstanding XL’s 1QFY18 loss of RM21mil, we expect its core earnings momentum to regain traction as subscriber growth normalise following the completion of Indonesia’s pre-paid SIM registration exercise together with lower sales and marketing costs in 1QFY18.

• Nepal-based NCELL’s revenue rose 4% QoQ as its domestic revenue increase more than offset the declines in international long distance services. However, its core earnings slid 6% QoQ due a one-off prior year tax assessment.

• The Bangladesh-based Robi registered a 4.7x increase in loss to RM61mil due to higher interest rates while cost efficiencies from the merger with AirTel have yet to materialise.

• The only core operation within the group which registered QoQ growth was Sri-Lanka-based Dialog whose earnings increased 12% from growth across key segments and cost efficiencies.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, way below its 2-year average of 8.1x vs SingTel’s 14x, with attractive dividend yields of 4%.

Source: AmInvest Research - 23 May 2018