Still Relatively Weak

Despite the strong improvement qoq, results were still fairly weak dragged down by lofty depreciation charges. Axiata’s 1Q17 core net profit of RM228m was below expectations, hit by higher depreciation and interest charges, and losses at Idea. We cut our 2017-19E EPS by 20-26%. Maintain Hold but at a higher target price of RM5.

1Q17 Core Earnings Declined 38% Yoy - Below Expectations

Axiata reported a 1Q17 revenue and net profit of RM5.9bn (+17% yoy) and RM239m (-35% yoy) respectively. Core net profit of RM228m (-38% yoy) accounted for only 13% and 15% of our and the street’s 2017 estimates respectively. The variance against our forecast was attributed to a combination of a lower EBITDA margin (37.5% vs our forecast of 38.5%), higher-than-expected depreciation charges and losses from associates vs our earlier estimate of profits. Despite 1Q17 revenue growth, higher depreciation charges (+30% yoy) and interest expense (+25% yoy) as well as associate losses (profit in 1Q16), dragged group earnings lower.

Sequentially Better, But Still Relatively Weak

As expected, the earnings momentum improved sequentially, although not at the quantum earlier envisaged, due largely to the still lofty depreciation charges. Core earnings more than doubled qoq to RM228m, driven predominantly by the absence of accelerated depreciation, which amounted to RM128m in 4Q16. The 1Q17 EBITDA margin was nevertheless weaker, down 2.2ppts qoq, dragged down by weaker margins at Celcom (down 2.1ppts qoq to 33.4%). 80%-owned Ncell (18% of group EBITDA) was also impacted by higher competition and the significant lowering of termination rates resulting in a 3ppts qoq decline (in its own currency) in its EBITDA margin. XL, which contributes 29% to group EBITDA, saw a relatively flat quarter, while Robi saw a 3.1ppts qoq improvement in its EBITDA margin albeit from a low base.

Maintain HOLD. TP Raised to RM5.00

Post the results, we cut our 2017-2019 EPS forecasts by 20-26%. Our SOTP-based target price is, however, raised to RM5.00 (from RM4.41) as we roll forward our valuation horizon and adjust some valuation parameters for Celcom, Smart Cambodia and edotco. We maintain our Hold rating and believe that earnings should further improve in the quarters ahead, especially from its current low base. Key upside risks include a strong turnaround of its subsidiaries and a dividend surprise while intensified competition in key markets poses the key downside risk.

Source: Affin Hwang Research - 26 May 2017