Results

• Profit growth – Axiata reported a PATAMI of RM204m in 2Q19 as compared to a net loss of RM3.36b in 2Q18 when it had a non-cash impairment of RM3.4b. On a normalised basis, 2Q19 PATAMI grew 6% YoY to RM228m due to higher revenue from most operating companies (OpCos) and ongoing cost optimisation.

• Higher revenue - Quarterly revenue grew 5% YoY to RM6.15b as all operating companies recorded higher revenue except Celcom and Ncell.

• Better QoQ – 2Q19 normalised PATAMI climbed 10% QoQ on the back of a 3% QoQ rise in revenue as all OpCos posted higher revenue except for Celcom and Robi. Meanwhile EBITDA declined 14% QoQ due to lower contribution from all OpCos except Dialog.

• Digital losses remain a drag - 1H19 normalised PATAMI dropped 17% YoY to RM438m mainly due to RM140m losses in its digital business and RM60m absence of share of M1 profit. Six months’ revenue grew 4% QoQ with most OpCos delivering higher sales except for Celcom and Ncell.

• Lower gearing – After the repayment of debt, cash reserve dropped to RM5.4b from RM6.8b in 1Q19. As a result, net debt/EBITDA was slightly lower at 1.37x vs 1.43x in 1Q19.

• Dividend - Axiata announced an interim dividend of 5 sen and we are expecting DPS of 10 sen for the full year, translating into a yield of 2%.

Earnings Outlook/Revision

• Earnings below expectation – 1H19 normalized PATAMI of RM438m came below our expectation after accounting for 35% of our FY19 estimate. Six months’ revenue of RM12.1b is within forecast after making up 45% of our FY19 forecast.

• Forecast maintained – We are keeping our forecasts for FY19 and FY20 in anticipation of narrowing losses in the digital arm and cost optimization will extend its momentum after achieving RM473m YTD out of its FY19 target of RM1.2b.

• Outperforming KPIs - Axiata is in line to beat its headline KPI of 5-8% EBITDA growth and 5.2-5.6% ROIC while being in line with 3-4% revenue growth. Five of the six OpCos maintained or gained revenue market share and delivered highest profit growth in their respective markets.

Valuation & Recommendation

• Downgrade to HOLD from BUY with an unchanged target price of RM4.95 based on Sum-Of-Parts (SOP) after share price appreciated in recent months.

Further catalyst is the potential merger with Telenor Group while potential risk is outcome of the capital gains dispute with Nepal’s tax authority.

• Merger update - The management noted that progress is still ongoing (in the midst of legal documentation and discussions with various governments) and due diligence is expected to complete within the next 6 months.

Source: JF Apex Securities Research - 30 Aug 2019