• The Covid-19 pandemic, lockdowns and weakened economies should affect all of Axiata’s operating companies (opco). We expect Ncell to see the largest financial impact, followed by Dialog and Celcom; XL, on the other hand, may see a relatively smaller impact.
• We cut our 2020-22 earnings forecasts by 4-14% after fine-tuning our revenue forecasts for the different opcos, taking into considering the latest updates on the countries’ lockdowns and the IMF’s revised GDP forecasts.
• Axiata’s share price has declined by 22% ytd and underperformed the market, its domestic peers and its listed subsidiaries. At 37x 2021E PER, the risk-reward proposition is now more balanced. We upgrade Axiata to HOLD (from Sell) with a revised price target of RM3.20 (from RM3.40).

No Opco Is Spared From Covid-19, Lockdowns and Economic Weakness

Not with standing Axiata’s wide geographical diversification, we expect the financial performance of all its opcos to be affected by the Covid-19 pandemic, lockdowns and weakened economies in the respective home countries. To assess the potential financial impact, we have studied several indicators / factors such as the Oxford Covid-19 Stringency Index, the opcos’ revenue breakdown, composition of the subscriber base, competition, the country’s economic outlook, and availability of alternative telco products. Overall, we conclude that Ncell may see the largest financial impact, followed by Dialog and Celcom. On the flip side, Smart and XL may emerge relatively unscathed compared to the other opcos.

Cutting 2020-22 Earnings Forecasts by 4-14%

We forecast Axiata to see a 5% revenue decline in 2020 due to the Covid-19 related challenges, intense competition in several markets (Malaysia, Sri Lanka) and structural decline in certain products (ILD in Nepal). We have revised our revenue forecasts (cutting our projections for Ncell, Dialog and Robi) while raising our assumptions for XL, and lowered our 2020-22 earnings forecasts by 4-14%.

Upgrade to HOLD With a Revised Price Target of RM3.20 (from RM3.40)

We have lowered our SOP-derived price target to RM3.20 (from RM3.40) after incorporating our latest earnings forecasts. Axiata’s share price has declined by 22% ytd and underperformed its peers. This has, in our view, partly reflected its weak earnings outlook. In view of the now balanced risk-reward proposition, we upgrade Axiata to HOLD (from Sell).

Source: Affin Hwang Research - 23 Jul 2020