• Lower bottomline - Axiata’s normalised PATAMI dropped 37% YoY to RM291m due to lower profits from operating companies (OpCos) namely Celcom (Malaysia), Robi (Bangladesh), Dialog (Sri Lanka) and associates Idea (India) and M1 (Singapore).

• Revenue higher on Ncell’s inclusion – 1Q17 revenue grew 17% YoY to RM5.88bn due to contribution from newly-acquired Ncell and higher revenue from all OpCos except Celcom.

• Major units stabilising - Celcom’s subscribers continue to decline but ARPU was flat. Meanwhile, XL (Indonesia) posted lower losses amid higher subscribers and ARPU. Management sees signs of turnaround for its two largest OpCos.

• Other OpCos facing challenges – After its merger with Airtel, Robi managed to half its losses and is progressing with network integration. Dialog’s performance was flat amid implementation of value-added tax (VAT). Meanwhile, NCell (Nepal) suffered from lower international call revenue and aggressive data pricing.

• Improved QoQ – 1Q17 normalised PATAMI jumped 278% QoQ to RM291m mainly due to lower losses by associates and joint ventures as OpCos struggle with their bottomlines. Quarterly revenue climbed 1.6% QoQ with mixed performances among OpCos.

Earnings Outlook/Revision

• Earnings below expectation – First quarter normalized PATAMI of RM291m account for 15% of full year estimate while revenue of RM5.88bn makes up 25% of FY17 forecast.

• Forecast reduced – We are lowering our EPS forecast for FY17 and FY18 by 16% and 12% respectively on higher network cost, higher tax rate and anticipated higher depreciation while keeping revenue forecasts unchanged.

• Improved gearing - Cash reserve increased to RM6.7bn from RM5.3bn in 4Q16 while total borrowings declined RM20.7bn from RM22.3bn after loan repayment which effectively lowered net debt/EBITDA to 1.6x from 2.0x in 4Q16.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM4.58 (from RM4.75) based on Sum-Of-Parts (SOP) following our earnings cut.

Source: JF Apex Securities Research - 26 May 2017