Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.05/share, which translates to an FY19F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel).

• We maintain Axiata’s forecasts as 1HFY18 normalised net profit of RM591mil (pre-MFRS 15), excluding RM3.4mil impairment from the deconsolidation of India-based Idea from the group accounts with a RM358mil loss on dilution, came in within expectations, making up 53% of our FY18F earnings and 49% of consensus. As a comparison, 1HFY15-1HFY17 accounted for 53%-59% of their respective years.

• As we have highlighted, despite the non-cash impairments from the Idea-Vodafone merger which cut Axiata’s equity stake from 16% to 9%, Axiata declared an interim dividend of 5 sen (flat YoY) and reaffirmed that FY18F payout will match 85% in FY15, before it slashed its distribution following FY16 spectrum fee outlays.

• Axiata’s 2QFY18 normalised net profit almost doubled QoQ largely from the absence of associate losses from Idea, which registered a 1QFY18 loss of RM114mil. YoY, the group’s 2QFY18 normalised earnings fell 20% due to lower contributions from all divisions except Bangladesh-based Robi, which posted a sharp drop in loss to RM7mil from RM61mil in 1QFY18 on normalising sales and marketing costs following the merger with AirTel.

• Celcom’s 2QFY18 revenue rose 3% QoQ and 4% YoY, driven by the 27K rise (+0.3%) in subscribers to 9.6mil. This is the second consecutive quarterly accretion since Celcom’s unbroken subscriber contraction beginning in 4Q2015. For comparison, Celcom has lost 2.9mil subscribers (-23%) over 2.5 years.

• Unlike Maxis and Digi which lost 318K and 262K prepaid subscribers in 1H2018, we note that Celcom’s subscriber expansion was driven largely by the prepaid segment, which accounted for 82% of the 78K increase on the back of improved sales distribution and simplified product offerings.

• Notwithstanding the higher revenue, Celcom’s 2QFY18 normalised net profit decreased 15% QoQ to RM158mil due to higher staff costs and depreciation. Hence, we remain conservative for Celcom’s margin assumptions.

• While XL’s 2QFY18 loss widened to RM38mil from RM21mil in 1QFY18 from a 26% increase in direct expenses, its revenue and EBITDA were commendably flat against the headwinds of Indonesia’s pre-paid SIM registration exercise which caused a 1.7mil prepaid subscriber drop (-3%).

• Nepal-based NCELL’s revenue rose 4% QoQ as its domestic data business more than offset the declines in international long distance services which accounts for 26% of income. Hence, its core earnings edged up 5% QoQ to RM159mil, partly supported by the absence of a one-off prior year tax adjustment in 1QFY18.

• Sri Lanka-based Dialog’s EBITDA grew at a commendable 8% on lower operating costs on a steady 2% revenue, but higher depreciation charges led to a 10% earnings contraction.

• SMART in Cambodia managed to grow 12% QoQ amid stabilising completion and regulatory changes, driving its EBITDA expansion of 9% and earnings increase of 4%.

• With revenue growth prospects improving for Celcom, XL, NCELL, Dialog and SMART, Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, way below its 2-year average of 8.1x vs SingTel’s 12x, with attractive dividend yields of 4%.

Source: AmInvest Research - 27 Aug 2018