• Lower profit– Axiata reported a PATAMI of RM120m in 3Q19, representing a 9.4% YoY decline due to absence of earnings contribution from M1 and higher taxes in Bangladesh. On a normalised basis, PATAMI declined 20.6% YoY to RM253m while EBITDA grew 10% YoY to RM2.17b due to higher contribution from all operating companies (OpCos) except Ncell.

• Higher revenue - Quarterly revenue grew 1.9% YoY to RM6.21b as all OpCos recorded higher revenue except Celcom and Ncell.

• Better QoQ – 3Q19 normalised PATAMI climbed 4% QoQ mainly due to higher bottomline contribution from edotco and Robi while revenue was flat after declining 0.1% QoQ. Meanwhile EBITDA grew 15% QoQ due to higher contribution from all OpCos except Ncell.

• Lower YTD - 9M19 normalised PATAMI dropped 13% YoY to RM733m mainly due to absence of share of M1 profit, expenses for proposed merger with Telenor and higher tax rate in Bangladesh. Nine months’ revenue grew 3.4% YoY with all OpCos delivering higher sales except for Celcom and Ncell.

• Steady gearing – Net debt/EBITDA was flat at 1.97x vs 1.98x in 2Q19 despite cash reserve dropping to RM5.0 from RM5.4b in 2Q19 as cash proceeds from the stake sale in M1 was used to repay debt.

Earnings Outlook/Revision

• Earnings below expectation – 9M19 normalized PATAMI of RM733m came below our expectation after accounting for 53% of our FY19 estimate. Nine months’ revenue of RM18.2b is within forecast after making up 68% of our FY19 forecast.

• Forecast reduced – We are lowering our EPS and revenue forecasts for FY19 by 12% and 7% respectively while FY20 estimates are reduced by 14% and 9% respectively due to weaker-than-expected performances in Celcom, Dialog and Ncell.

Valuation & Recommendation

• Upgrade to BUY from HOLD with a lower target price of RM4.81 (RM4.95 previously) based on Sum-Of-Parts (SOP) as share price declined recently after the merger with Telenor was called off. We expect various OpCos to continue improve given their strong market positions despite regulatory risks and market competition. Earnings will also be buoyed by ongoing cost reduction on the group level.

Source: JF Apex Securities Research - 29 Nov 2019