Axiata’s FY18 core net profit of RM824m (-32% YoY) missed expectations. Overall performance was impacted by unfavourable forex, weaker EBITDA margin (Celcom’s ELP restructuring and digital investment), higher D&A and MFPS impact. Not too excited with FY19 headline KPIs but with greater emphasis on profitability. We raise our TP slightly to RM3.80 as the earnings revision was cushioned by the incorporation digital’s valuation. Maintain HOLD.

Below expectation. FY18 turnover of RM23.9bn translated in to a disappointing core net profit of RM824m, accounting for 89% of our full year expectation but above street’s at 130%. However, we believe that Bloomberg’s consensus is distorted as some headline PAT were captured instead of core.

Dividend. Resolved a single tier tax exempt dividend of 4.5 (4Q17: 3.5) sen per share subject to AGM’s approval. YTD dividend amounted to 9.5 (FY17: 8.5) sen per share, representing a payout ratio of 85%.

QoQ. Revenue inched up 4% thanks to higher contributions from all OpCos except Dialog. Reported LAT was RM2bn mainly due to one-off asset write off and accelerated depreciation which amounted to RM1.8bn. Excluding that, core net profit still fell by 34% attributable to higher operational cost which included “100k free smartphone” special campaign and tax rate.

YoY. Top line was flat at RM6.3bn impacted by unfavourable forex. At constant currency, turnover actually improved 6% driven by Celcom, Dialog and Smart. Adjusting for the large one-off item, core earnings declined 25% for the same reasons above.

YTD. Turnover was down by 2% as RM strengthened against all regional currencies. At constant currency, top line was stronger by 6% driven by better performances from Celcom and Dialog. Core net profit plunged 32% attributable to weaker EBITDA margins and MFRS impact.

Celcom. Sub base experienced a net churn of 154k and ended FY18 with 9.1m subs as it lost 256k prepaid subs, erasing the 102k postpaid net adds. Blended ARPU strengthened to RM50 (+RM1 QoQ) lifted by both prepaid and postpaid ARPU. LTE population coverage stood at 91% and spurred smartphone penetration to reach 78% (4Q17: 74%). Data consumption was upped 18% QoQ to 15.4GB per month per sub. One-off Employee Life Plan (ELP) restructuring spilled-over into 4Q18 which involved the layoff of 400 employees.

FY19 headline KPIs. At constant currency and pre-MFRS-16, (1) Revenue growth of 3-4%; (2) EBITDA growth of 5-8%; (3) ROIC of 5.2-5.6%; and (4) Capex of RM6.8bn broken-down to Celcom (RM1bn), XL (RM2.2-2.3bn), Dialog (RM700m), Smart (RM300m), Robi (RM1bn), Ncell (RM500m), edotco (RM800m) and Digital (RM200-300m).

Forecast. Based on the latest data points and guidance, our FY19-20 EPS projections were revised by -4% and +15%, respectively. Reiterate HOLD with a slightly higher SOP-derived TP of RM3.80 as impact from downward earnings revision was cushioned by the incorporation of the valuation of digital businesses. We like its regional exposures with focus on emerging countries which may deliver great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a catalyst.

Source: Hong Leong Investment Bank Research - 25 Feb 2019