Axiata’s 1H17 core earnings were 42% of our 2017E estimates, broadly inline with expectations. 2Q17 core earnings rose 48% qoq due to better performance across major operating companies and a lower tax rate. We expect further operational improvement ahead, albeit coming from a low base. There was no material impact from its Pakistan tower acquisition. Maintain HOLD and TP of RM5.00.

1H17 Core Earnings Declined 23% Yoy - Within Expectations

Axiata’s 1H17 core profit of RM566m (-23% yoy) was dragged lower by weaker EBITDA margins (-1.2ppts yoy) and higher depreciation (+16% yoy) and interest charges (+19% yoy). 1H17 revenue was, however, up 16% yoy although driven largely by consolidation of Ncell (from 2Q16). Robi was a major performer with revenue growth of 40% yoy, although Celcom’s revenue was lower by 4% yoy. Sequentially, core profits jumped 48% driven by revenue growth, margin improvement and a lower tax rate. Most of its major operating companies posted stronger earnings qoq. Of significance were the wider losses from associates, dragged down by Idea, which is facing stiff competition, as a result of a new entrant.

Acquiring 13k Towers in Pakistan – But No Immediate Listing Plans

Separately, 62.4% owned tower operator edotco will partner Dawood Hercules Corp Ltd and is to together acquire Deodar Pte Ltd which owns 13k tower assets in Pakistan for USD940m (64% debt funded). At an implied EV/EBITDA of 8.1x, the transaction appears fair to us and provides edotco a market leadership position in Pakistan (total of 13.7k towers). The combined tenancy ratio at c. 1.4x also provides for upside in a market with growing population and low smartphone and data penetration. Moreover, the towers are largely tenanted by Jazz, the leading mobile operator in Pakistan. The impact from the acquisition, while accretive to Axiata, is marginal given the estimated enhancement of +3% to 2016 PATAMI (which is on a low base). Shareholders may however be disappointed that even after a substantial increase in its tower base to 40k post the acquisition, Axiata has no immediate plans for an edotco listing.

Maintaining HOLD Rating and TP of RM5.00

We make no changes to our forecasts and maintain our SOTP-based 12- month TP of RM5.00. We maintain our HOLD as we expect more operating improvement ahead, although this could already be reflected in the shares (2018E PER of 28x). Upside risks: strong turnaround of its subsidiaries and a dividend surprise; downside risk: intensified competition in key markets.

Source: Affin Hwang Research - 5 Sept 2017