• Profit continued to decline - Axiata’s 2Q18 normalised PATAMI dropped 43% YoY to RM264m due to higher depreciation and amortisation charges following aggressive investments in data over the past 2 years, absence of tax benefits enjoyed in 2017, and higher investment in digital businesses.

• Non-cash impairment - For the headline figure, Axiata posted a net loss of RM3.36b due to a RM3.38b provision on reclassification of Idea Cellular (India) from associate to simple investment arising from Idea’s merger with Vodafone. To recap, Axiata did not participate in Idea’s new issuance of shares, resulting in its stake being cut from 19.7% to 16.3%. The provision is a non-cash technical impairment.

• Higher revenue - Quarterly revenue increased 4.6% YoY to RM6.3b as all operating companies (OpCos) recorded higher revenue and market share.

• Improved operations QoQ – 2Q18 normalised PATAMI dropped 22.5% QoQ due to higher depreciation. However, quarterly revenue climbed 3.8% QoQ while EBITDA rose 5.6%.

• Lower contributions from major OpCos - Celcom’s (Malaysia) normalized PATAMI dropped 17% QoQ to RM156m due to higher depreciation. Meanwhile, XL (Indonesia) fell into the red with a loss of RM19m following higher depreciation as well. Robi’s (Bangladesh) loss narrowed to RM8m while other OpCos (Dialog, Smart and Ncell) posted flat earnings.

• Steady gearing - Total borrowings was slightly higher at RM18.7b (vs RM18.2b in 1Q18) as net debt/EBITDA was flat to 1.52x vs 1.53x in 1Q18.

• Dividend – Axiata declared an interim dividend of 5 sen. We expect full year dividend of 9.4 sen.

Earnings Outlook/Revision

• Earnings within expectation – 1H18 normalized PATAMI of RM591m (-24% YoY) came within our expectation after accounting for 51% of FY18 estimate. Six months’ revenue of RM12.5b (+5% YoY) is also within forecast after making up 50% of our FY18 forecast.

• Forecast maintained – As such, we are keeping our forecasts for FY18 and FY19.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM4.95 based on Sum-Of-Parts (SOP). Growth will be driven by earnings recovery in XL and ongoing operation efficiencies.

• Going forward, edotco’s acquisition of Deodar is expected to be completed in 3Q18. Management also sees opportunities in 4G rollout in Bangladesh and Nepal.

Source: JF Apex Securities Research - 27 Aug 2018