• Lower profit - Axiata’s 1Q18 normalised PATAMI dropped 31% YoY to RM200m due to higher losses from associate Idea Cellular (India), start up investments in new digital businesses and lower contribution from Smart (Cambodia) and edotco. For headline figure, Axiata posted a net loss of RM141m due to RM358m loss of dilution in Idea after not participating in new issuance of shares, resulting in its stake being cut from 19.7% to 16.3%.

• Steady revenue - Quarterly revenue increased 5.2% YoY to RM6.19b following improved sales in all divisions except Smart (Cambodia).

• Slower QoQ – 1Q18 normalised PATAMI dropped 4% QoQ as lower contribution from all Operating Companies (OpCos) was cushioned by smaller loss from associates. Quarterly revenue was flat after falling 1.2% QoQ due to lower operating days.

• Higher subscribers – All OpCos achieved more subscribers except for Ncell. Overall ARPUs were slightly lower following competitive pricing in certain markets.

• Lower contributions from major OpCos - Celcom’s (Malaysia) normalized PATAMI dropped 26.5% QoQ to RM186m due to change in revenue mix and additional investments to enhance network experience. Meanwhile, XL (Indonesia) fell into the red with a loss of RM21m following prepaid SIM registration process and price competition which impacted mobile industry revenue by -5%. Robi’s (Bangladesh) loss widened to RM61m partially due to higher interest rate while other OpCos (Dialog, Smart and Ncell) posted flat earnings.

• Steady gearing - Total borrowings was flat at RM18.2bn as net debt/EBITDA inched up to 1.53x vs 1.34x in 4Q17.

Earnings Outlook/Revision

• Earnings below expectation – 1Q18 normalized PATAMI came below our expectation after accounting for 14% of FY18 estimate as we underestimated the decline in profit from OpCos. Three months’ revenue of RM6.19b is within forecast after making up 24.6 % of FY18 forecast.

• Forecast reduced – Revenue estimates are maintained but we trim our EPS forecast for FY18 and FY19 by 18.5% and 17% respectively to account for the lower-than-expected earnings contribution from OpCos and the challenging outlook.

• Management cited challenges being the delay in Idea-Vodafone merger, continued deterioration of market condition in India, continued price war in Indonesia and Cambodia and GST uncertainty in Malaysia. Following the Idea-Vodafone merger, there could be a non-cash impairment of RM1.2-1.8b.

• Going forward, edotco’s acquisition of Deodar is expected to be completed in 2Q18. Management also sees opportunities in 4G

rollout in Bangladesh and Nepal.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM4.95 (previously RM5.20) based on Sum-Of-Parts (SOP) following losses in Idea.

Source: JF Apex Securities Research - 23 May 2018