• Earnings tumbled – Axiata’s reported 1Q20 PATAMI plunged 74% YoY to RM188m due to one-off items namely Celcom employee restructuring cost (RM77m) and XL’s gain from tower sale (RM279m), as well as forex loss (RM123m). Normalised PATAMI dropped 42% YoY to RM121m due to higher depreciation & amortisation of RM160m, lower contribution from Ncell and higher losses from digital business.
• Steady revenue - Quarterly revenue climbed 1.5% YoY to RM6.04b due to higher contributions from all operating companies (OpCos) except Celcom (-6% YoY) and Ncell (-10% YoY).

• Lower QoQ – 1Q20 underlying PATAMI tumbled 53% QoQ mainly while revenue falling 3% QoQ due to lower contribution from Celcom and Ncell.

• COVID-19 impact – Apart from Indonesia and Cambodia, all other markets were impacted by lockdowns from mid-March. OpCos were unable to conduct sales and service activities at retail outlets. For instance, Celcom had to delay product launches, which caused its revenue to drop 7% YoY. Meanwhile, Ncell saw revenue decline 10% YoY due to capacity constraint after significant delay in spectrum assignment.

• Higher gearing – Net debt/EBITDA inched up to 2.05x vs 2.02x in 4Q19 following an early drawdown of US$300m to refinance a bond due in April.

Earnings Outlook/Revision

• Earnings below expectation – 1Q20 revenue and EBITDA came within forecasts but PATAMI of RM121m achieved only 10% of our full year forecast.

• Forecast slashed – We are reducing our FY20 EPS and revenue forecasts by 10% and 45% respectively in anticipation of higher COVID-19 impact in 2Q20 before recovery in 2H20.

• 2020 KPIs withdrawn – Following the uncertainties caused by COVID-19, the management has withdrawn its KPIs for 2020 and shift its focus to conserving cash and liquidity to build a war chest for opportunities. Management aims to reduce cost by RM0.9b in 2020 by reducing opex and deferring 15% of its capex.

Valuation & Recommendation

• Maintain BUY with a lower target price of RM4.15 (previously RM4.81) based on Sum-Of-Parts (SOP).

Source: JF Apex Securities Research - 22 May 2020