Axiata reported a decent set of results – 2019 net profit of RM1.46bn was a strong recovery from a RM5bn net loss in 2018 when the group was hit by impairments of assets and loss on dilution of Idea. Adjusting for the one-offs (forex losses, gain / losses on disposals), Axiata’s 2019 core net profit of RM960m was inline with the street’s expectations but 14% above our expectations due to stronger than expected earnings from XL and Celcom. Looking ahead, management expects Axiata’s 2020 revenue to grow by 3.5-4.5% and EBITDA to increase by 4.0-5.5%. In view of the robust 4Q20 results and management’s positive guidance, we have raised our 2020-21E EPS forecasts by 2-3%. In tandem, with lifted our SOP-derived price target to RM4.40 (from RM4.30). Maintain HOLD.

2019 Core Profit at RM960m – Within Street But Above Our Forecasts

Axiata reported a decent set of results - 2019 core net profit of RM960m was a strong recovery from RM1.1bn core net loss in 2018 when its earnings was hit by accelerated depreciation and impairment amounting to RM1.8bn. Operationally, the group saw stronger earnings from Celcom, XL, Robi and edotco while Dialog and Ncell earnings were weaker yoy. Management declared a 2nd interim dividend of 4.0 sen and special dividend of 0.5 sen; its full year dividend of 9.5 sen was same as 2018. Overall, the results were within market expectations but 14% above our forecasts due to stronger than expected earnings from XL and Celcom.

OpCos’ Results (pre-MFRS16, Constant Currency)

- Celcom: 2019 revenue slipped on lower device sales and decline in wholesale service revenue; EBITDA had however increased by 8% yoy on lower operating expenses (ie. Staff cost, marketing cost);

- XL: Higher 2019 EBITDA (+16% yoy) due to strong revenue growth (+10% yoy), driven by higher data consumption;

- Robi: Notable 44% yoy increase in 2019 EBITDA driven by higher service revenue (+10% yoy) and lower marketing costs;

- edotco: 2019 EBITDA grew by 23% yoy on higher revenue (+18%);

- Dialog: Despite a 2% EBITDA growth, 2019 normalised net profit was 26% lower yoy due to higher depreciation charges;

- Ncell: lower 2019 EBITDA (-10% yoy) due to lower revenue (-6% yoy) attributable to price competition from ISPs and the introduction of a 13% telecommunication service charges in 2019.

2020 KPIs: Revenue Growth of 3.5-4.5%; EBITDA Growth of 4.0-5.5%

Looking ahead, management expects to grow its 2020 revenue by 3.5-4.5% (based on constant currency) and EBITDA by 4.0-5.5%. Axiata also targets to achieve a ROIC of 5.5-6.0%. Management is budgeting a capex of RM6.6bn for 2020, an increase from RM6.2bn spent in 2019. Management sees a challenging market in Malaysia and Nepal but optimistic on the Indonesian and Bangladesh market.

Appointment of Dato’ Izzaddin Idris as Deputy GCEO

Axiata has appointed Dato’ Mohd Izzaddin Idris as Deputy Group CEO and Group CEO-designated with immediate effect as of 24th Jan 2020. Izzaddin will succeed as Group CEO by December 2020. Izzaddin has served on Axiata’s Board since November 2016 and is involved in the OpCos as Chairman of Robi and a Board member of Dialog. Izzaddin was Group MD and CEO of UEM Group Berhad from 2009 till 2018.

Listing of Robi by 4Q 2020

Axiata has proposed to list Robi in Bangladesh following a Fixed Price method. The group intends to offer 523.8m new Robi shares (10% of the enlarged share capital) at a Par value of BDT10 per share. The total proceeds of BDT5.2bn (c. RM255m) will be used to fund Robi’s capex. The IPO is expected to be completed by 4Q 2020 and Robi will be the 11th Largest Listed Company in Bangladesh.

Raising 2020-21E EPS by 2-3% and PT to RM4.40 (from RM4.30)

In view of the robust 2019 results and management’s positive earnings guidance, we have raised our 2020-21E EPS forecasts by 2-3% after incorporating stronger earnings contributions from Celcom and XL. We have also fine-tuned our earnings projections for the other OpCos after incorporating Axiata’s 2019 financial statement. We introduce our 2022E earnings forecasts; we expect Axiata to achieve 7% earnings growth driven by higher contribution from its OpCos. In tandem, we have lifted our SOPderived price target to RM4.40, from RM4.30 previously.

Maintain HOLD

We maintain our HOLD rating on Axiata. While we expect higher contribution from its overseas operations to lift 2020-22E earnings, we acknowledge that these countries have high policy / forex risks that may negatively affect Axiata’s profitability. At 29x 2020E PER, Axiata is trading at a premium to peers’ average PER of 26-27x, looks fair, as some of its digital businesses (ie. Boost, ada) are still loss-making, but valuable.

Upside risks are higher revenue/profit contribution from Axiata’s key operating companies. Downside risks include earnings disappointment or heightened competition in key operating markets.

Source: Affin Hwang Research - 24 Feb 2020