Axiata reported a weak set of results – 1Q19 core net profit fell by 33% yoy to RM209m on weaker contributions from Celcom and Ncell, accounting changes and higher losses from its digital business. Reported net profit however grew strongly to RM709m (from a net loss of RM147m in 1Q18) on several one-off gains. Overall, the results were below market and our expectations. We lowered our 2019-21E core EPS by 13-21% after incorporating accounting changes and lowered our forecasts for several operating companies. We roll forward our valuation horizon to 2020 and lower our SOP-derived target price to RM5.17 (from RM5.20). Maintain BUY. We are positive on Axiata for the proposed merger with Telenor Asia. The merger should help unlock Axiata’s SOP valuation and we expect the merger to generate substantial business and cost synergy for both companies.

Lower 1Q19 Core Net Profit (-33%), Below Expectations

Axiata reported a disappointing set of results – 1Q19 core net profit fell by 33% to RM209m on weaker contributions from Celcom and Ncell, adoption of MFRS 16 (Fig 2), lower associate / JV earnings (after the disposal of M1) and higher losses from digital business. The group’s 1Q19 reported net profit was substantially higher at RM709m (from RM147m net loss in 1Q18) due to: (i) gain from disposals (M1, non-core digital business); (ii) forex gain; and (iii) the divestment of Idea that dragged its 1Q18 earnings. Axiata’s 1Q19 core net profit accounts for 17% of the street and 15% of our full year forecasts; below expectations. The earnings disappointments were due to weaker profits from several operating companies (i.e. Celcom, Ncell) and higher than expected losses from other businesses (i.e. digital business).

OpCos’ Results Comparison (pre-MFRS 16): Mixed EBITDA Growth

Celcom (1Q19 EBITDA: RM436m, -4% yoy) - weaker EBITDA due to lower revenue and the recognition of RM35m one-off network cost from LTE expansion. XL (1Q19 EBITDA: RM682m, +13% yoy) – higher EBITDA tracking increase in revenue due to a broad recovery in the Indonesia telco revenue. Dialog (1Q19 EBITDA: RM289m, +15% yoy) – strong performance from higher contributions across all segments. Robi (1Q19 EBITDA: RM251m, +38% yoy) – higher EBITDA due to higher revenue and lower customer acquisition costs. Robi reported a positive net profit in 1Q19, from losses in 1Q18. Ncell (1Q19 EBITDA: RM326m, -5% yoy) – lower EBITDA due to lower revenue following an increase in Telecom Service Charge (TSC) in Jul18.

Source: Affin Hwang Research - 29 May 2019