Period  2Q13/1H13

Actual vs. Expectations  Axiata’s 1H13 core PATMI of RM1.3b (-5.9% YoY) came in within expectations and accounted for around 47.0% of our and the street’s full-year estimates. The lower core PATMI on a YoY basis was mainly due to margin pressure as a result of lower revenue in XL and higher costs incurred to support its data investment.

Dividends  Declared 8.0 sen interim dividend (1H12: 8.0 sen).

Key Result Highlights  YoY, revenue rose 5.2% to RM9.1b driven by higher contribution from all its key operating companies except those in Indonesia. On a constant currency basis, the revenue would have grown 7.6%. Group EBITDA was lower by 3.2% to RM3.64b while margin dipped by 3.4ppt to 40.0% due mainly to the operating costs in Indonesia (SMS interconnects fee and aggressive network costs to accommodate data growth). The lower margin led to a lower core PATMI of RM1.3b (-5.9%).

 QoQ, the turnover improved by 3.3% while the EBITDA margin declined 0.6ppt to 40.3% as a result of higher operating expenses from both XL (marketing & network costs) and Robi (interconnect costs; staff costs & network costs).

 Celcom continued to perform well with its revenue growing 5.1% YoY to RM4.0b in 1H13 while its EBITDA margin was sustained at 44.5% (1H12: 44.6%). Total data revenue grew by 4.3% YoY to RM1.3bm in 1H13 with advanced data (excluding SMS) up by 8.9% YoY to RM958m.

Outlook  There were no changes in the group’s FY13 KPIs, where Axiata is targeting to achieve revenue and EBITDA annual growth rates of 7.6% and 0.2% respectively.

Change to Forecasts  Post result, we have lowered our FY13 (-3.0%) and FY14 (-1.8%) core PATMI after fine-tuning and increase our interest cost assumption.

Rating   Maintain MARKET PERFORM

Valuation  Lowering our TP for Axiata to RM6.70 (from RM6.72 previously) based on an unchanged targeted FY14 EV/Forward EBITDA of 8.2x (+1.0 SD).

Risks  Regulation and currency risks in its overseas ventures.

Conference call highlights    FY13 headline KPIs on track. Despite intensifying competition in its Indonesia operation; the group believes that it remains on track to achieve its FY13 KPIs (annual revenue growth of 7.6% YoY and EBITDA growth of 0.2% YoY) based on its 1H13 result performance. Nevertheless, currency volatility poses a great challenge in meeting its KPI. Competitive environment in its operating subsidiaries remains healthy except for Indonesia. Axiata remained optimistic that it would sail through the choppy waves in its key operating subsidiaries despite the intensifying competitive environment. Nevertheless, heightened competition and cost pressure (mainly from product pricing, SMS interconnection rates and continuing data network investments) continue to remain a challenge to XL’s profitability, although the group had managed to regain some market position and expand its subscriber base over the last couple of months. Capital call by Idea Cellular. Idea Cellular, a 19.9% stake owned by Axiata, recently issued a notice for a capital call for c.USD600m for the upcoming new telecom license that may be awarded by the DOT (Department of Telecommunications) in India. To recap, Idea Cellular had earlier refused to sign new telecom permit (Unified Licence) as it barred operators from entering into 3G intra-circle roaming agreement. Nevertheless, both parties have lately managed to draw a conclusion to incorporate certain clauses under the new licence agreement for the seven circles, namely Assam, Jammu and Kashmir, Kolkta, North East, Orissa, Tamil Nadu and West Bengal.

We understand that Axiata has an option to subscribe to its share, which may result in a cash outflow of about USD120m. Axiata indicated that they are currently undertaking a business study of the above-mentioned cash call, which we believe the country’s policy execution risk will remain as one if its key consideration. As of end 2Q13, Axiata has cash pile of RM6.6b with a gross debt to EBITDA ratio of 1.89x. The ratio is still below its optimal capital structure of 2.0—2.2x gross debt/EBITDA level, thus suggesting that Axiata still has headroom to leverage up if need be.

Source: Kenanga