• Profit surged - Axiata’s 1Q19 reported PATAMI jumped more than 100% YoY to to RM709m from a loss of RM147m in 1Q18 mainly due to disposal gains of RM113m from disposal of stake in M1 and RM302m from transfer of its non-core digital businesses to a fund manager.

• On a normalised basis after removing the one-off disposal gains, PATAMI declined 24% YoY to RM226m due to lower revenue from Celcom and Ncell, depreciation, amortisation, interest cost and discontinued share of profit from M1.

• Higher revenue - Quarterly revenue grew 3.5% YoY to RM5.95b as all operating companies (OpCos) recorded higher revenue except Celcom and Ncell.

• Lower QoQ – 1Q19 normalised PATAMI dropped 30% QoQ on the back of a 5% QoQ decline in revenue while EBITDA rose 16% QoQ on the back of ongoing cost efficiencies and adoption of MFRS 16. All OpCos saw sales decline except for XL and Smart.

• Improved EBITDA – EBITDA grew 16% QoQ and 19% YoY to RM2.4b with all OpCos showing improvement except Celcom, Ncell and digital services. Overall, EBITDA margin climbed to 41% from 33% in 4Q18.

• Lower gearing – After the disposal of M1 for RM1.65b, cash reserve grew to RM6.8b from RM5.1b in 4Q18. As a result, gross debt/EBITDA declined to 2.21 x vs 2.29x in 4Q18.

Earnings Outlook/Revision

• Earnings within expectation – 1M19 normalized PATAMI of RM226m came within our expectation after accounting for 16% of our FY19 estimate. Three months’ revenue of RM5.95b is also within forecast after making up 22% of our FY19 forecast.

• Forecast maintained – We are keeping our earnings forecasts for FY19 and FY20. Growth will be driven by earnings momentum as OpCos continue outperform in the industry as well as ongoing operation efficiencies as management has achieved RM262m of cost savings YTD out of its FY19 target of RM1.2b.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM4.95 based on Sum-Of-Parts (SOP).
• Further catalyst is the potential merger with Telenor Group while potential risk is stemming from outcome of the capital gains dispute with Nepal’s tax authority.

Source: JF Apex Securities Research - 29 May 2019