• Earnings surprise – Axiata’s reported 3Q20 PATAMI almost doubled YoY to RM353m while Underlying PATAMI rose 48% YoY to RM377m due to improved cost excellence and lower loss from ADS due to absence of e-Tunai Rakyat.
• Flat revenue - Quarterly revenue dropped 1.6% YoY to RM6.1b due to lower contribution from operating companies (OpCos) such as Celcom, Ncell and Smart.
• Better QoQ – 3Q20 underlying PATAMI surged over 600% QoQ due to revenue growth of 5.5% QoQ as operations recovered to pre-lockdown level as well as lower depreciation by RM55m and lower loss from ADS due to absence of e-Tunai Rakyat.
• Challenges in Nepal – Due to the easing of lockdown restrictions, all OpCos showed QoQ improvement except for Ncell and Robi which saw PATAMI declined 34% QoQ and 33% QoQ respectively. Ncell was impacted by spectrum constraint, pricing challenges from ISPs and Nepal’s lockdown in September. Meanwhile, Robi’s profit was pressured by higher depreciation and finance cost.
• Lower YTD – 9M20 reported PATAMI dropped 45% YoY to RM621m while underlying PATAMI declined 22% YoY to RM544m due to one-off items namely Celcom employee restructuring cost (RM77m) and XL’s gain from tower sale (RM299m), as well as forex loss (RM103m). Meanwhile, 9M20 revenue was 2.1% YoY lower at RM17.9b.
• Higher gearing temporarily – Gross debt/EBITDA climbed to 2.89x from 2.64x in 2Q20 after the US$1.5b bond issurance in August but management noted gearing will revert to around 2.5x after debt repayment in November.

Earnings Outlook/Revision

• Earnings above expectation – 9M20 revenue came within forecasts but normalized PATAMI of RM544m achieved 110% of our full year forecast.
• Forecast raised – We are lifting our FY20 EPS forecast by 69% following the higher-than-expected earnings rebound.
• Management guidance - The management has guided a low single digit % decline for revenue and EBITDA in 2020.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM4.53 (previously RM3.93) based on Sum-Of-Parts (SOP). We expect earnings growth to sustain given the increased demand for data amid the pandemic.
• Risks include:
  • Covid-19 situation worsens
  • Higher competition and government CSR programme in Indonesia
  • Further delays for Ncell’s tech spectrum
  • Bad debt provision for edotco

Source: JF Apex Securities Research - 2 Dec 2020