Axiata’s 1H16 results came in below expectations. An interim dividend of 5.0 sen was announced, also below our anticipation. Management has lowered its FY16 KPIs followed an uninspiring 1H16 result. Post-results review, we slash our FY16E/17E earnings by 33%/29%. Maintain MARKET PERFORM with lowered TP of RM5.70 (from RM5.81, previously) based on unchanged targeted FY17 EV/forward EBITDA of 7.1x, representing -2.0x SD below its 4-year mean.

Below expectation. Axiata’s 1H16 core PATAMI of RM835m (-27% YoY) came in below expectation and merely accounted for 34% of both our and the street’s full-year estimate (vs. the historical 48%-56% of full-year results for the past five financial years). The lower core PATAMI on a YoY basis was mainly impacted by sub-optimal performance at Celcom, Robi and Idea, as well as higher D&A, finance cost and forex losses. On our end, the key negative variance was mainly due to higher-than-expected D&A and finance cost.

Declared a lower-than-expected interim dividend of 5.0 sen (vs. 1H15: 8.0 sen) during the quarter. For the full financial year, we have lowered our DPS forecast to 16.0 sen (vs. 23.0 sen previously), implying a dividend payout ratio of 86% (in-line with the historical trend), which translates into a dividend yield of 2.9%.

YoY, revenue improved by 9% mainly driven by Nepal consolidation, higher revenue reported by Dialog and positive translation impact. On a constant currency basis, the revenue growth rate would have increased by 3.7%. Group EBITDA, meanwhile, improved by 14% with margin enhanced by 170bps to 38.2% as a result of Nepal consolidation. Its normalized PATAMI, however, sank by 27% due to: (i) accelerated depreciation in XL, (ii) higher amortization of intangible assets arising from acquisition of Nepal operations, (iii) higher net finance costs, and (iv) lower share of profits from associates. QoQ, turnover improved by 6% (or 8.4% at constant currency) thanks to the consolidation of Nepal. Group EBITDA, meanwhile, advanced 10% with margin increased by 1.5pp to 38.9%.

Expecting higher D&A and finance cost ahead in view of the rapid capex spending over the recent years and higher amortization from Nepal operations as well as greater interest costs incurred when converting the USD-denominated loans to the local currencies (in key OpCos).

Challenges continue where management foresees competition to remain intense in Malaysia, Indonesia, Bangladesh, Singapore and India. Meanwhile, the uncertainty of spectrum pricing and fee structure in Malaysia as well as the 2100Mhz and 2300Mhz spectrum auctions in Indonesia also provide some headwinds to the group. On the flip side, Celcom cited that it has seen some recovery sign in the postpaid segment (following the introduction of new ‘data-led’ product bundles), and will focus on addressing its prepaid segment (after recording a total of 897k negative subscriber’s net adds in 2Q16) in the remaining months.

Lowered FY16 KPIs. The disappointed set of 1H16 results have led Axiata to revise its 2016 KPIs lower (expected a marginally lower annual growth rate in revenue/EBITDA vs. 12.2%/16.0% YoY previously, based on 1USD=RM4.20). Its capex, meanwhile, is expected to trend up to approximately RM6.0b (vs. RM5.7b previously) to prepare for the upcoming new spectrum structure in Malaysia.

Slash FY16E/FY17E core PATAMI by 33%/29%, after imputing (i) higher finance cost to RM1.3b/RM1.4b (+85%/+48%), and (ii) higher D&A to RM5.0b/RM5.1b (+15%/+17%). All in all, we expect Axiata to record 8.4%/12.6% YoY in revenue/EBITDA growth for FY16.

Source: Kenanga Research - 26 Aug 2016