• Strong profit – Axiata’s 2Q21 reported PATAMI more than tripled YoY to RM278m due to strong performance in all operating companies (OpCos). Similarly, underlying PATAMI (excluding forex impact) rose more than six folds YoY to RM302m mainly due to lower losses from digital services and higher EBITDA contribution from OpCos.

• Higher revenue - Quarterly revenue grew 10% YoY to RM6.39b due to higher contribution from all OpCos.

• Better QoQ – 2Q21 underlying PATAMI increased 38% QoQ due to lower accelerated depreciation and higher EBITDA by all OpCos except Ncell. Quarterly revenue rose 5.4% QoQ due to higher contribution from all OpCos.

• Improved OpCos - All OpCos’ revenue have recovered to prelockdown levels except Ncell, which was impacted by restricted movement, network coverage disadvantage and spectrum constraint.

• Resilient tower business – edotco’s 2Q21 PATAMI declined 18.5% QoQ to RM74m on the back of a 1.5% QoQ revenue growth to RM480m driven by Malaysia and Bangladesh markets. Management noted that the tower business has experienced limited impact from the Myanmar coup so far.

• Narrowed losses from digital services – ADS’ 2Q21 revenue more than doubled QoQ to RM284m thanks to digital advertising while net loss grew 30% QoQ to RM38m. For 1H21, net loss declined 65% YoY to RM67m from RM191m in 1H20 following narrowed losses at its digital financial services.

• Strong margins – Axiata maintained its EBITDA margin of 44% thanks to operating cost savings of RM225m in 1H21.

• Steady gearing – Net debt/EBITDA was flat at 1.85x while cash reserves increased to RM7b in 2Q21 from RM6.6b in 1Q21. Adjusted Operating free cash flow improved to RM786m from RM710m in the previous quarter.

Earnings Outlook/Revision

• Earnings met expectation – 1H21 revenue and normalized PATAMI achieved 52% and 58% of our full year forecasts respectively.

• Forecast maintained – As such, we are keeping our FY21 EPS forecast.

• Management guidance - The management maintained its guidance of a low single digit % growths for both revenue and EBITDA in 2021 as well as capex of RM6.5b.

• Merger update – The management updated that they have submitted the relevant documents for the Celcom-Digi merger and is now pending approval by the authorities.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM4.53 based on Sum-Of-Parts (SOP). We expect earnings growth to sustain given the resilient demand for data and improved profitability from digital services.

• Risks include: Covid-19 situation worsens, regulatory development and 5G rollout in Malaysia and slower than expected recovery in Ncell.

Source: JF Apex Securities Research - 30 Aug 2021