Axiata reported a disappointing set of results - 1Q20 core net profit fell by 40% yoy (-53% qoq) to RM125m due to higher depreciation and amortisation charges (XL, edotco), higher taxes for Robi and higher digital business losses (spent on e-Tunai Rakyat initiative). Looking into 2Q20, the Covid-19 pandemic and the lockdown in most of the countries it operates in (except Indonesia and Cambodia) should have a significant impact on its profitability. We cut our 2020-22 earnings forecasts by 5- 14% and trimmed our SOTP-derived price target to RM2.55. Maintain SELL. At a 40x 2021E PER, Axiata is trading at a premium to peers, and looks pricey considering its challenging business outlook and high debt.

Disappointing 1Q20 Core Net Profit of RM125m (-40% Yoy / -53% Qoq)

Axiata reported a weak set of results – 1Q20 core net profit fell by 40% yoy to RM125m due to higher depreciation and amortisation charges (due to an aggressive network rollout at XL and edotco), higher taxes for Robi, and higher digital business losses (spent on e-Tunai Rakyat initiative). The 1Q20 reported net profit was higher at RM188m due to a gain on tower sales by XL (RM279m) that more than offset forex losses (RM119m) and the RM77m restructuring cost at Celcom. Overall, the results were below both market and our expectations. Axiata’s 1Q20 core net profit only accounted for 11% / 16% of the street’s / our previous full-year forecasts.

OpCos’ 1Q20 Results

- Celcom: Service revenue fell 7% yoy on a delay in product launches. Celcom’s number of subs. fell by a steep 10.8% yoy (-4.7% qoq) to 7.98m. Excluding the RM77m restructuring cost, Celcom’s underlying profit was higher yoy (low base in 1Q19) but weaker qoq; - XL: service revenue grew by 8.8% yoy driven by the higher ARPU (+9.1% yoy) due to strong data demand. Excluding gains from its tower sale, XL reported core net losses of RM25m due to higher depreciation and amortisation charges; - Robi: service revenue grew by 7% yoy due to the increase in the number of subs. Robi reported a RM6m core net profit in 1Q20, from RM7m losses in 1Q19; - edotco: Revenue rose 3.7% yoy due to a higher number of towers. - Dialog: Revenue was flat yoy (in local currency). Core net profit slipped by 8% due to higher depreciation charges; - Ncell: Lower revenue (-11% yoy) due to capacity constraints from the delay in spectrum assignment and competition from fixed ISPs.

Source: Affin Hwang Research - 22 May 2020