Axiata reported a disappointing set of results – 9M18 core net profit fell by 28% yoy to RM581m due to lower profit from OpCos, attributable to strengthening of the Ringgit and higher depreciation/amortisation. Axiata booked in a RM3.69bn non-cash provision on derecognition of Idea, resulting in a 9M18 headline net loss of RM3.37bn. Overall, the results were below both market and our expectations. We cut our 2018- 20E EPS by 8-21%, maintain HOLD with a lower target price of RM3.63.

Lower 9M18 Core Net Profit of RM581m, Below Expectations

Adjusting for the RM3.69bn non-cash provision on derecognition of Idea and forex impact, Axiata’s 9M18 core net profit fell by 28% yoy to RM581m due to: (i) strengthening of Ringgit against regional currencies; (ii) higher depreciation and amortisation (D&A) costs (in underlying local currencies); (iii) RM131m loss on digital investments; and (iv) higher finance cost for Robi due to interest rate hike. Overall, the results were below market and our expectations – 9M18 core net profit accounted for 58-59% of street and our full year forecasts. The earnings disappointments was due to weaker profits from several OpCos (ie. XL, Robi) and the recognition of RM81m share of losses from Idea (in 3Q18) before it ceased to be equity accounted on 16th August 2018.

3Q18 Core Profit Grew by 14% on Higher Revenue, Lower Taxation

Sequentially, Axiata’s 3Q18 core net profit grew by 14% to RM207m on higher revenue (+2.3% qoq) and EBITDA (+2.4% qoq) and lower taxation, which more than offset lower associate earnings – share of net loss for Idea was RM81m in 3Q18, versus RM20m share of net profit in 2Q18.

In Ringgit Terms, 9M18 Earnings From OpCos Were Broadly Lower

Weaker 9M18 earnings from: (i) Celcom reported lower 9M18 profit due to higher D&A charges and one-time internal employee restructuring costs; (ii) XL slipped into losses on higher D&A arising from network expansion; (iii) despite strong EBITDA growth; Robi’s profitability was affected by higher finance cost; (iv) Axiata booked in RM131m expenses on digital investments; and (v) Smart saw lower profit due to higher regulatory cost from increased revenue share. Dialog remained a bright spot, reporting stronger normalised earnings on higher revenue across all business segments (mobile, fixed and pay-TV).

Cutting FY18-20E Core EPS by 8-22%

We cut our 2018-20E core EPS by 8-22% to reflect the weaker-than-expected 9M18 earnings and lower earnings forecasts for several OpCos (ie. Robi, XL, and Celcom) in view of the difficult operating environment arising from stiff competition and higher borrowing costs. We have also upgraded our earnings forecasts for Dialog, taking into consideration its solid 9M18 earnings and positive operational statistics.

Maintain HOLD With a Lower Target Price of RM3.63

We have lowered our 12-month SOP-derived price target (Fig 1) to RM3.63 (from RM4.42). We made two major changes: (i) valuing the OpCos using EV/EBITDA methodology (from DCF) to better reflect the fast changing operating environment and market risk premium in these emerging economies; and (ii) higher holding company discount of 25% (from 10%) in view of the slowing M&A activities in these markets.

Maintain HOLD. While we expect gradual revenue gains in its key operating subsidiaries, the stiff competition, high investment capex 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 - 26 Nov 2018