Axiata reported a modest set of results – 6M19 core pretax profit grew by 29% yoy to RM1.1bn on higher EBIT from overseas operations (XL, Robi). But core net profit came in lower at RM438m (-11% yoy) due to higher taxation. Although the operational performance beat our forecasts, the core net profit was below market and our expectations due to the higher-than-expected tax rate. We cut our 2019E core EPS by 10% but raising 2020-21E estimates by 4% after incorporating higher EBIT from Robi and XL, and an increase in Robi’s effective tax rate. In tandem, we have revised up our SOTP-derived TP to RM5.20 (from RM5.17). We downgrade Axiata to HOLD from Buy in view of the limited share price upside. While we like the proposed merger with Telenor Asia, we believe that the positives are largely priced in (Axiata share price has increased by 25% since the announcement in May 2019).

Decent 6M19 Pretax Earnings But Core Profit Missed on High Taxation

Axiata reported a modest set of results – 6M19 core pretax profit came in above expectations at RM1.1bn (+29% yoy) on higher EBIT from overseas operations (XL, Robi, Smart and Dialog). But core net profit slipped 11% yoy due to higher taxation in Bangladesh (due to a change in tax law) and Indonesia (write-down of some deferred tax assets). The group’s 6M19 reported net profit was substantially higher at RM913m (from RM3,505m net loss in 6M18) due to: (i) gains from disposals (M1, non-core digital business); (ii) forex gain; and (iii) lower one-off losses. Axiata’s 6M19 core net profit accounts for 39% of the street and 41% of our full-year forecasts; below expectations. The earnings disappointment was mainly due to higherthan-expected taxes.

OpCos’ Results (pre-MFRS16, Constant Currency)

- Celcom: notwithstanding a lower revenue, Celcom’s 6M19 EBITDA grew by 5% yoy on lower operating expenses;

- XL: Higher 6M19 EBITDA (+16% yoy) on the back of higher revenue (more subs, higher ARPUs), driven by strong data growth;

- Robi: 70% yoy increase in 6M19 EBITDA driven by higher service revenue. Net profit was however affected by the higher tax rate on revenue;

- Dialog: 6M19 EBITDA grew by 5% yoy on higher revenue, driven by the fixed segment;

- Ncell: lower 6M19 EBITDA (-12% yoy). Earnings were impacted by changes in Telco Services Charges and a drop in ILD revenue.

Source: Affin Hwang Research - 30 Aug 2019