Axiata’s 1H19 core net profit of RM438m (+2% YoY) missed expectations. Declared an interim single tier tax exempt dividend of 5 sen per share. Celcom and Ncell were major drags while others performed better. Merger talk and due diligence are still on track to complete by Nov 2019. We lower our FY19-21 earnings and fair value is revised to RM4.85 (from RM4.94). We think that current price has fully reflect the potential of the mega merger despite the uninspiring results. Maintain HOLD.

Below expectations. 2Q19 core net profit of RM229m (+10% QoQ, -3% YoY) took 1H19’s total to RM438m (+2% YoY), forming 40% and 38% of HLIB and consensus full year forecasts, respectively. The shortfall was attributed to higher-than-expected effective corporate tax rate and MI. 2Q19 one-off adjustments include forex loss (RM55m), asset disposal gain (RM116m) and other losses (RM86m).

Dividend. Declared an interim single tier tax exempt dividend of 5 sen (2Q18: 5 sen) per share. Entitlement and payment dates will be announced later.

QoQ. Sales rose by 3% supported by XL (+5%), Robi (+3%), Dialog (+4%), Ncell (5%) and Smart (+7%), while Celcom and edotco were rather flat. Despite higher D&A and effective tax rate, core net profit expanded by 10% to RM229m thanks to lower operating cost as Axiata put more emphasis on profitability than revenue market share growth.

YoY. Top line grew by 5% driven by expansions from XL (+16%), Robi (+18%), Dailog (+3%), Smart (+15%) and edotco (+17%), more than sufficient to offset the declines in Celcom (8%) and Ncell (6%). However, core earnings slipped 3% due to higher D&A, absence of M1 contribution and higher tax impact.

YTD. Top line grew 4% to RM12.1bn supported by the gains in all OpCos except Celcom and Ncell. Bottom line inched up by 2% to RM438m thanks to higher contributions all OpCos’ (except Dialog and edotco) efficiency improvement.

Telenor-Axiata merger. Negotiations and due diligence are still on track focusing on commercial, national and staff interests. Confident to complete within the 6-month period (by Nov 2019).

Celcom. Blended ARPU strengthened to RM51 (+RM2 QoQ) at the expense of user base churn of 172k and ended 2Q19 with 8.8m. In 2Q19, there was a one-time RM50m reversal in direct cost while staff normalized higher QoQ and that should be the run rate going forward. Contribution from webe’s domestic roaming was lower than-expected but expect traffic to pick up in 3Q19.

XL. Its outperformance was due to lower-than-expected D&A. Both QoQ and YoY quarterly improvements were mainly attributable to data-led top line gain as well as EBITDA margin expansion on the back of cost efficiency. Data growth remains solid supported by network quality and smartphone adoption.

Forecast. Tweak our assumptions based on the deviations mentioned above as well as new capex guidance. In turn, our FY19-21 EPS projections were cut by 9%, 10% and 2%, respectively.

Reiterate HOLD with a slightly lower SOP-derived TP of RM4.85 (see Figure #2) reflecting the downward earnings revision. We like its regional exposures with focus on emerging countries which may deliver great growth potentials. However, regulatory and execution risks are major concerns. Mega merger with Telenor Asia is a near term catalyst.

Source: Hong Leong Investment Bank Research - 30 Aug 2019