• Strong 3Q20 core net profit of RM374m (+47% yoy), driven by rebound in revenue, lower depreciation costs, reduced losses from digital business and decline in provision for bad debts / staff incentive programmes.
• 3Q20 results beat consensus and our expectations on strong revenue recovery and some reversal of provisions. We do not expect Axiata to replicate the strong results in the near term.
• We raise our 2020-22E EPS forecasts by 16-74% but maintain our HOLD rating with a higher price target of RM3.95. After rebounding by 31% mom, we believe Axiata’s share price has priced-in the strong earnings recovery.

Strong 3Q20 core profit of RM374m (+689% qoq, +47% yoy)

Axiata reported a strong set of results driven by a rebound in revenue across all countries, lower depreciation, lower losses from digital business, reversal of provision for incentive programmes and decline in bad-debt provisions. Celcom and Dialog were the star performers, reporting 24% and 26% qoq recovery in EBITDA on higher revenue and improved profit margins. Meanwhile Ncell also staged a strong sequential earnings recovery, but its 3Q20 EBITDA of RM218m (+41% qoq) was still 27% lower yoy due to the prolonged lockdown in Nepal and the business challenges arising from spectrum constraints.

Earnings were above expectations, but difficult to replicate in the near term

Cumulatively, Axiata’s 9M20 core net profit came in at RM546m (-21% yoy). The earnings were above the market and our expectations – Axiata’s 9M20 core net profit accounted for 84% of street and 120% of our full-year earnings forecasts. The earnings beat was due to stronger-than-expected revenue recovery in the South Asia markets (Bangladesh and Sri Lanka), lower depreciation and higher profit margin partly attributable to the decline in bad-debt provisions (Celcom and Dialog) and reversal for provisions for incentive reward programmes (Celcom). Broadly, the strong 3Q20 earnings are partly attributable to the overprovisioning in the prior quarter. Similar to the bad quarter preceding it, we do not expect Axiata to repeat the smashing 3Q20 results in the near term.

OpCo’s 3Q20 results overview

- Celcom: 3Q20 EBITDA rebounded by 24% qoq to RM710m (+11% yoy) on higher service revenue (driven by 339k increase in number of prepaid subs), lower staff costs (reversal of provisions) and lower provisions for bad debts;

- XL: Higher 3Q20 EBITDA (+1% yoy / +1% qoq). Stiff competition has supressed its revenue and EBITDA growth;

- Ncell: 3Q20 EBITDA rebounded by 41% qoq but remained lower yoy due to prolonged lockdown and business challenge arising from spectrum constraint;

- Robi: 3Q20 EBITDA slipped by 13% qoq (+11% yoy) due to operating costs (network, direct and manpower costs);

- Dialog: Higher 3Q20 EBITDA of RM309m (+26% qoq / +11% yoy) due to the easing of lockdown and reversal of bad-debt provisions;

- Smart: 3Q20 EBITDA grew by 4% qoq (+4% yoy) on the back of higher revenue.

Management guided for low single-digit decline in 2020 revenue and EBITDA

In spite of the stellar 3Q20 results (9M20 EBITDA grew by 1.8% yoy), management is guiding for a low single-digit decline in 2020 revenue and EBITDA. Among the challenges (risks) are: (i) the intensifying competition in Indonesia and the government’s data-subsidy programme; (ii) reimplementation of the CMCO in Malaysia and curfews in Sri Lanka; (iii) further delays for Ncell’s spectrum allocation; (iv) bad debt provision for edotco; and (v) weak economic growth may affect consumer affordability / spending.

Raising 2020-22E earnings forecasts by 16-74%

We raise Axiata’s 2020-22E earnings forecasts by 16-74% after incorporating: (i) the strong 9M20 results; (ii) higher revenue for the Robi and Dialog, (iii) better profit margin for Celcom; and (iv) lower earnings growth for Ncell. We are raising our SOTP-derived 12-month price target to RM3.95 (from RM3.15) after incorporating the earnings forecasts, lowering our SOTP discount to 15% (from 20%) and increasing the valuation multiples for Robi, Dialog and Smart in view of the improving economy and business conditions.

Maintain HOLD

Notwithstanding our earnings and price target upgrade, we maintain our HOLD rating on Axiata. Axiata’s share price has rebounded by 31% mom and outperformed the KLCI by 23%. The strong recovery in its share price has largely reflected the rapid improvement in its operating environment (from the challenging 2Q20). At 34x 2021E PER, the risk-reward proposition looks balanced. Upside risks: stronger-thanexpected quarterly earnings 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 - 30 Nov 2020