• Axiata ended 2017 on a mixed tone; 4Q17 EBITDA rose 17.5% yoy and 15.2% for FY17 on improvements at Celcom, XL Axiata, Robi, and group-wide cost optimization initiatives.

• Ooq, earnings rang a subdued tone as opex rose (due to one-off costs) which led to 6% qoq EBITDA decline.

• Overall, gains from operational revamps were negated by Idea’s widening losses in 2017, resulting in 15% core PATMI drop to trail ours and consensus estimates at only 93%.

• Management remains positive and expects earnings recovery momentum to sustain in 2018. It has earmarked CAPEX worth RM7.4bn (FY17: RM6.5bn) or 28.5% of revenue.

En route to recovery

In a nutshell, Axiata dialed in a solid operational recovery in 2017 with 15.2% EBITDA growth. However, core PATMI fell 15% yoy, dragged by losses at its 18%-owned Idea which widened in 2017 and, to a lesser extent, its Bangladesh unit, Robi, which finalized the merger with Bharti’s Airtel in Nov 2016.

Improved performance at other op-cos

The broad-based growth across other op-cos (operating companies) were encouraging as a result of product revamp, cost optimization, and investments in network and processes. Celcom’s EBITDA grew 10% in 2H17 (vs 1H17), focusing on high-value customers which led to higher postpaid and prepaid ARPUs. XL’s earnings momentum was sustained after returning to the black in 3QFY17, drawing success from its dual-brand strategy and strong data revenue growth (+61%) in 2017. NCell’s EBITDA grew 56% as impact from lower ILD revenues were more than offset from cost optimization.

Going forward

Management is confident that the operational improvements would carry through to 2018. It guided 2018 CAPEX of RM7.4bn (excludes spectrum expenses) or 28.5% of revenues. Management noted that competition in Malaysian market has moderated and expects further gains made by Celcom. Despite 2017 earnings shortfall, we raise 2018/19 estimates by 10%/17% on better growth at Celcom and XL.

Maintain HOLD with a higher SOP-derived TP of RM5.55

We share management’s optimism of Axiata’s outlook especially with Celcom’s recovery gaining traction. However, the competitive nature of the sector could see the operating landscape shifting drastically. We raise our TP to RM5.55 (from RM4.82) but retain our HOLD call on the stock. Accumulate on dips.

Source: BIMB Securities Research - 23 Feb 2018