• Loss due to exceptional items - Axiata’s posted loss after tax and minority interest of RM309m in 4Q16 vs PATAMI of RM504m in 4Q15 due to forex losses, accelerated depreciation in XL and Robi, adjustment in Ncell’s purchase price allocation, merger fee for Robi and Airtel’s merger, declined contribution from associate Idea and start-up losses in Axiata Digital Services (ADS) of RM114m. Excluding the above-mentioned exceptionals, 4Q16 normalised PATAMI tumbled 81% YoY and 85% QoQ to RM77m.

• Revenue lifted by Ncell’s inclusion – 4Q16 revenue grew 8% YoY and 6% QoQ to RM5.79bn mainly due to contribution from newly-acquired Ncell. Without the Nepalese subsidiary, revenue would have dropped 3.1% YoY mainly due to decline revenue from Axiata’s biggest units Celcom and XL.

• Smaller op-cos continue to grow – Dialog and Smart continued to enjoy double-digit revenue and profit growths. Despite a 11% QoQ revenue growth, Robi posted loss after tax of RM117m due to one-off merger fees, voluntary retirement scheme and accelerated depreciation.

Earnings Outlook/Revision

• Earnings below expectation – Twelve months’ normalized PATAMI of RM1.42bn account for 65% of full year estimate while revenue of RM21.6bn makes up 97% of FY16 forecast.

• Forecast reduced – We are lowering our EPS forecast for FY17 and FY18 by 10% and 3% respectively on higher network cost, anticipated higher depreciation, start-up costs in ADS while keeping revenue forecasts unchanged.

• Higher gearing - Cash reserve declined to RM5.3bn on capex and loan repayment after operating free cash outflow of RM1.42bn, resulting in net debt/EBITDA jumping to 2x from 1.6x in 3Q16.

• Dividend slashed – Axiata announced a final dividend of 5 sen, taking full year dividend to 8 sen vs 20 sen in FY15. Payout ratio was effectively reduced to 50% from 85% in 2015 as the company adopts a prudent approach to conserve cash for 4G capex, expansion of tower unit, and spectrum auction/renewal in most markets in the next 1 to 2 years. Management expects to revert to 2015 levels within two years.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM4.75 (from RM5.10) based on Sum-Of-Parts (SOP) following our earnings cut.

Source: JF Apex Securities Research - 24 Feb 2017