Axiata’s 1Q18 results were broadly in line with our expectations. Despite a 3% yoy growth in 1Q18 EBIT, Axiata’s core profit slipped by 16% yoy due to higher losses from Idea. We expect Idea’s woes to ease after the completion of the ongoing Idea-Vodafone merger. Overall, we see operational improvement in its key operating subsidiaries; however, stiff competition in the Malaysian and Indonesian telco markets may continue to weigh on investor sentiment. Maintain HOLD and RM5.20 target price.

1Q EBIT Grew by 3%; Core Profit Slipped on Higher Associate Losses

Axiata reported a mixed bag of results – 1Q18 core net profit fell by 16% yoy to RM192m due to: (i) higher losses of RM114m from its associate, Idea (from a RM25m net loss in 1Q17); and (ii) lower revenue from its overseas operations due to the strengthening of the Ringgit against the regional currencies (+8-16%), partly mitigated by lower depreciation and amortisation charges.

The Results Were Broadly in Line – We Expect Lower Losses From Idea

Overall, Axiata’s 1Q18 EBIT of RM708m (+3% yoy) is within our forecast, accounting for 22% of our full-year estimate. While the group’s 1Q18 core net profit of RM192m (15% of our full-year forecast) looks short, we deem the results as in line, expecting lower losses from its associate (Idea) in the coming quarter. The Idea-Vodafone merger is ongoing; post-merger, Idea will be reclassified as an investment and have less impact on earnings. Nevertheless, the results were below market expectations.

Dialog, Robi, XL and NCell Were Up; Smart and Celcom Came in Lower

Operationally, Dialog, Robi, XL and NCell have delivered yoy EBITDA growth in their respective domestic currencies on higher service revenue (XL, Robi, NCell), revenue growth across all segments (Dialog) and the reaping of merger integration synergies (Robi). On the flipside, Celcom reported lower 1Q18 EBITDA due to one-off network-related expenses while Smart was affected by price pressures and a regulatory impact.

Maintain HOLD

We maintain our SOP-derived target price of RM5.20. While we expect further operational improvement in its key operating subsidiaries, the earnings drag from Idea and stiff competition in the Malaysia and Indonesia telco markets may continue to weigh on investor sentiment. Upside risks: strong turnaround of its subsidiaries; downside risk: intensified competition.

Source: Affin Hwang Research - 23 May 2018