• Lower profit - Axiata’s 4Q18 reported a loss of RM1.66b against a net profit of RM24.7m in 4Q17 due to depreciation, impairments and amortisation totalling RM3.25b. Normalised PATAMI dropped 21% YoY to RM165m due to digital investments, tax and finance costs while EBITDA declined 10% YoY to RM2.8b

• Flat revenue - Quarterly revenue increased 0.1% YoY to RM6.27b as all operating companies (OpCos) recorded steady revenue.

• Slower QoQ – 4Q18 normalised PATAMI dropped 55% QoQ due to digital investments, tax and finance costs while revenue was slightly lower after shedding 1.4% QoQ and normalized EBITDA declined 13% QoQ.

• Lower YTD – FY18’s reported loss of RM5.03b was due to depreciation, impairments and amortization totaling RM7.64b. Normalised net profit dropped only 1.2% YoY to RM1.19b. Twelve months’ revenue grew 3.7% YoY to RM25.3b while EBITDA increased 2% YoY to RM9.4b.

• Kitchen sinking – In FY18, Axiata made non-cash impairments totalling RM7.64b such as:

• RM3.3b: Re-classification of investment in Idea from an associate to simple investment

• RM358m: Loss of dilution for not participating in new issuance of Idea shares

• RM186m: Discontinuing operations from Idea

• RM1.8b: Asset impairment of 2G and legacy networks which could result in depreciation savings of RM150m per year

• RM500m: Forex and derivative losses

• Higher gearing - Total borrowings was slightly lower at RM19.1b (vs RM19.5b in 3Q18) while cash declined to RM5.0b from RM6.0b in 3Q18. As a result, net debt/EBITDA inched higher to 1.69x vs 1.61x in 2Q18, which is still manageable. Cash proceeds of RM1.65b from the M1 stake sale would help lower gearing to 1.4x.
• Higher dividend – Axiata proposed a dividend of 9.5 sen/share (vs 8.5 sen/share in 2017) which is in line with our payout ratio expectation of 85%.
• Met 2018 KPIs – Axiata achieved its 2018 headline KPIs and introduced 2019 KPIs, namely revenue growth of 3-4%, EBITDA growth of 5-8%, ROIC of 5.2%-5.6% and capex target of RM6.8b.

Earnings Outlook/Revision

• Earnings within expectation – Despite the impairments, FY18 normalized PATAMI met our expectation after accounting for 102% of FY18 estimate while revenue is also in line with our forecast.

• Forecast maintained – As such, we are keeping our forecasts for FY19 and FY20.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM4.95 based on Sum-Of-Parts (SOP). Growth will be driven by earnings momentum as OpCos continue outperform in the industry as well as ongoing operation efficiencies as management strives to add on to the RM1.5b of cost savings in 2018.

Source: JF Apex Securities Research - 25 Feb 2019