Axiata reported a weak set of results – 1H18 net loss of RM3.5bn was due to RM3.38bn impairments in relation to India’s Idea and forex losses; 1H18 core net profit came in weaker at RM374m (-34% yoy) due to the strengthening of Ringgit, higher taxation and lower EBITDA margin. Despite the weaker-than-expected results, we raised our FY19- 20E EPS forecasts by 2-3% following the derecognition of loss making Idea, which more than offset earnings cut at Celcom and Robi. Maintain HOLD with a lower target price of RM4.42.

Lower 1H18 Core Net Profit of RM374m, Below Expectations

Axiata reported RM3.5bn of headline net loss in 1H18 after booking in a RM3.38bn non-cash provision on derecognition of Idea, a further RM464m losses from Idea (loss on dilution and operational loss) and RM96m forex losses. Adjusting for the one-offs and forex impact, Axiata’s 1H18 core net profit fell by 34% yoy to RM374m due to the strengthening of Ringgit vs regional currencies, higher taxation and lower EBITDA margin of 36.9% (from 38.1%). All in, the results were below market and our expectations. 1H18 core net profit accounts for 31-32% of the street and our full year forecasts; 1H18 core pretax profit accounts for 53% of consensus and 43% of our full year forecasts.

2Q18 Core Profit Slipped by 5% on Higher Depreciation and Taxation

Sequentially, Axiata’s 2Q18 core net profit came in weaker at RM182m (- 5% qoq) due to higher depreciation and amortisation, as well as higher taxation, partly offset by improved associate contributions following the derecognition of Idea.

Mixed performance from OpCos: Dialog reported higher 1H18 underlying profit, Ncell came in flat while Celcom, XL, Robi and Smart came in lower due to higher costs

Adjusted for forex fluctuation and one-offs, Dialog reported higher 1H18 underlying profit, driven by higher revenue across all segments and improved EBITDA margin. Meanwhile, Ncell reported flattish underlying profit due to higher revenue but lower EBITDA margins. On the other hand, Celcom, XL Axiata and Robi has reported lower earnings - while these OpCos reported higher revenue (in local currencies) due to growth in subscribers, their underlying profit has weakened (or losses widened) due to higher depreciations costs (XL, Robi), higher staff cost (Celcom) and higher finance cost / taxation (Robi).

Maintain HOLD With Lower TP of RM4.42

We cut our 2018E core EPS by 16% but raised 2019-20E core EPS forecasts by 2-3% after imputing the weak 1H18 results, higher tax rate for 2018E, lower losses from associates / JV following the derecognition of lossmaking Idea, and minor earnings cut at Robi and Celcom. In tandem, we have reduced our SOP-derived target price to RM4.42 (from RM4.54). Maintain HOLD. While we expect further revenue gains in its key operating subsidiaries, the stiff competition and rising cost pressures may continue to cap earnings growth and weigh on investor sentiment. Upside risks: strong turnaround of its subsidiaries; downside risk: intensified competition.

Source: Affin Hwang Research - 27 Aug 2018