Axiata’s 9M17 core earnings fell 25% yoy and were below our and consensus estimates, at 61-62% of the full year. Axiata continues to face the issue where improvement in select operating units is offset by other problems. Despite 2 consecutive quarters of EBITDA margin improvement, widening losses at associate Idea are now a drag on earnings. We maintain our HOLD call and fine tune our TP to RM5.23.

9M17 Core Earnings Declined 25% Yoy - Below Expectations

Axiata’s 9M17 core profit of RM811m (-25% yoy) was below expectations, accounting for 61-62% of our and consensus 2017E estimates. Although 9M17 EBITDA margins are tracking above our 2017E of 37.5%, we were negatively surprised by the higher depreciation charges (+10% yoy) and larger-than-expected losses at associate Idea (-RM278m, vs. RM83m for 9M16). We understand that Idea is still facing stiff competition, as a result of a new entrant resulting in the widening of losses of associates from RM105m in 2Q17 to RM142m in 3Q17). Overall, while topline grew 15% yoy, this was driven primarily by the full 9 months consolidation impact from Ncell (consolidated from 2Q16) and growth from Robi (+36% yoy) after the merger with Airtel. 9M17 EBITDA margin was relatively stable at 38.3%, down 0.9ppts yoy. Notably, while most operating units have registered improved margins qoq, Ncell’s EBITDA margins continued to slip yoy from 67.9% to 60.3% in 9M17, due to declining revenues from traditional long-distance voice calls in Nepal.

3Q17 Core Earnings Down 28% Qoq

Sequentially, 3Q17 EBITDA margins at 38.9% improved for the second consecutive quarter. We continue to see improvement across most operating units. The main drag to 3Q17 earnings, however, was from the wider losses at Idea. Meanwhile non-deductible tax expenses pushed the effective tax rate for 3Q17 to 43%. Nevertheless, this was also due to a relatively low tax rate of 16% in 2Q17, while the 9M17 effective tax rate at 30.5% is closer to our full-year assumption of 29%.

Maintaining HOLD Rating, But With a Slightly Higher TP of RM5.23

We lower our 2017-19E EPS by 7-14% after incorporating the 3Q17 results. However, we lift our SOTP-based 12-month TP to RM5.23, from RM5.00 as we make some adjustments to our net-debt assumptions. We maintain our HOLD call as we expect further operational improvement. Upside risks: strong turnaround of its subsidiaries and a dividend surprise; downside risk: intensified competition in key markets.

Source: Affin Hwang Research - 24 Nov 2017