• 2Q20 core net profit dived by 79% yoy to RM47m on lower EBIT (-29%), higher taxation and minority interests.
• Cumulatively, 6M20 EBITDA of RM9.9bn was robust but the core net profit came in below market and our expectations due to high effective tax rate.
• We trim our FY20-22E EPS forecasts by 2-23% and lower our price target to RM3.15 (from RM3.20). Maintain HOLD. Notwithstanding its weak profit outlook, we believe the sharp correction in share price (-38% yoy) has largely priced in the negatives.

2Q20 EBIT slipped by 19% qoq but net profit was hit by higher tax and MI

Operationally, Axiata reported a modest set of results. The group’s 2Q20 EBIT fell by 19% qoq to RM749m on lower contributions from Dialog and Ncell where business operations were affected by Covid-19 related lockdowns, partly cushioned by better performance from Celcom, XL and Robi. A high taxation and minority interest however supressed Axiata’s 2Q20 core net profit to a mere RM47m (-62% qoq).

The Results Were Below Market and Our Expectations

Cumulatively, Axiata reported a relatively solid 6M20 EBITDA of RM5.28bn (+1.3% yoy) but its core net profit fell by 61% yoy to RM172m on higher depreciation and amortisation expenses, high effective tax rate (45.5% in 6M20) and higher minority interests. Overall, the results were below market and our expectations – 6M20 core net profit account for 21% of street and 29% of our full-year earnings forecasts due to higher-than-expected tax rate and minority interest.

OpCo’s 6M20 Results Overview

- Celcom: 6M20 EBITDA fell by 15% yoy due to lower revenue (-9.5% yoy) attributable to Covid-19 lockdown, mandated free data, weak prepaid segment, and higher cost relating to employee restructuring charge;

- XL: Robust EBITDA growth of 7.3% driven by higher revenue and cost optimisation;

- Ncell: 6M20 EBITDA declined by a steep 32% yoy due to shutdown of distribution during the Covid-19 lockdown and higher network costs;

- Robi: Solid EBITDA growth of 8% on the back of higher data revenue and lower direct and network costs;

- Dialog: 6M20 EBITDA slipped by 2% due to impact of Covid-19 lockdown

- Smart: Higher EBITDA (+11%) due to lower marketing and network costs.

Trimming 2020-22E EPS by 2-23%

We trim Axiata’s 2020-22E earnings forecasts by 2-23% after incorporating: (i) the weaker-than-expected 6M20 results; (ii) higher effective tax rate (mainly in 2020E); (iii) lower earnings growth for Ncell and Dialog; and (iv) higher earnings from XL and Robi, in view of their resilient revenue growth. In tandem, we lower our SOTP-derived 12-month price target to RM3.15 (from RM3.20).

Maintain HOLD; Weak Share Price Has Somewhat Priced in the Weakness

We maintain our HOLD rating on Axiata. Axiata’s share price has declined by 38% yoy and underperformed its domestic peers and its listed subsidiaries. This has, in our view, partly reflected its weak earnings outlook. At 37x 2021E PER, the riskreward proposition is now more balanced. Upside risks: stronger-than-expected quarterly earnings due to resilient revenue or strong cost savings and value accretive M&As. Downside risks include major earnings disappointments, unfavourable government policy / tax changes and higher competition in key markets.

Source: Affin Hwang Research - 28 Aug 2020