Axiata’s 2017 core net profit was below expectations, falling 37% yoy to RM749m on higher associates / JV losses and an elevated tax rate. Sequentially, a weaker 4Q17 EBITDA, losses from associates and high effective tax rate of 75% has resulted in a 4Q17 core loss of RM62m. Elsewhere, management guided that consequence to IdeaVodafone merger, Axiata may incur non-cash technical impairment of RM1.2bn-RM1.8bn. We cut our 2018-19E earnings forecasts by 6%- 12%, maintain HOLD with a lower SOP-derived target price of RM5.20.

2017 Core Earnings Fell 37% Yoy – Below Expectations

Axiata reported a disappointing 2017 core profit of RM749m (-37% yoy), accounting for 58% of consensus and 65% of our 2017E estimates. The earnings miss is due to high depreciation charges (+6% yoy to RM6bn), large losses at associate /JV (-RM404m, vs. RM30m in 2016) and high effective tax rate of 40%. Elsewhere, a RM160m forex gain (RM685m forex loss in 2016) lifted headline net profit by 80% yoy to RM910m.

Ncell, Dialog, Smart and XL Shown Positive EBITDA Growth

Operationally, most of Axiata’s key business units delivered positive 2017 EBITDA growth on higher revenue and better cost management. Ncell reported the highest EBITDA growth of 53% after the consolidation of full year earnings (acquisition was completed in April 2016). Dialog came in second with 15% yoy EBITDA growth, followed by Smart (+10%) and XL (+6%). Malaysia’s Celcom saw a flattish EBITDA (+1% yoy) while Bangladesh’s Robi reported a decline of 9% due to deconsolidation of edotco Bangladesh and the inclusion of lower margin business operations from Airtel business.

Core Loss in 4Q17: Weaker EBITDA Margin, Losses at Associates, Tax

Sequentially, Axiata’s 4Q17 EBITDA margins slipped to 35.5% (from 38.9% in 3Q17) on higher operating costs. Most business units (aside from Ncell) had reported lower EBITDA in 4Q17. The low 4Q17 EBITDA (-8% qoq to RM2.2bn), further losses from associates (-RM127m) and high effective tax rate of 75% had dragged Axiata into core net loss of RM62m (from RM244m net profit in 3Q17).

Source: Affin Hwang Research - 23 Feb 2018