Axiata’s 9M16 results came in within our, but below the consensus’, expectations. No dividend was announced during the quarter. Post results review, we tweaked our FY16E/FY17E earnings by +2%/-26%. Raised rating to OUTPERFORM (from MARKET PERFORM previously as trading opportunities could potentially arise following a 28% dip in share price since mid-August) but with lower TP of RM4.81 (from RM5.34, previously) based on targeted FY17 EV/forward EBITDA of 6.6x, representing an unchanged -1.5x SD below its two-year mean.

In line with our, but below the consensus’, estimate. 9M16 core PATAMI of RM1.34b (-19% YoY) came in within our (at 83%) but below the consensus’ full-year estimate (at 68% vs. the historical 77%-79% of full-year results for the past three financial years). The lower core PATAMI on a YoY basis was mainly impacted by the sub-optimal performance at Celcom, XL, and Robi as well as higher D&A, finance cost and forex losses.

No dividend announced for the quarter. For the full financial year, we are keeping our DPS forecast unchanged at 16.0 sen (1H16: 5.0 sen), implying a dividend pay-out ratio of 87% (in line with the historical trend), which translates into a dividend yield of 3.7%.

YoY, revenue advanced 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 5%. Group EBITDA, meanwhile, improved by 13% with margin enhanced by 160bps to 38.2% as a result of the Nepal consolidation. Its normalized PATAMI, however, sank by 19% due to: (i) accelerated depreciation in XL and Robi, (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 3% (or 1.5% at constant currency) thanks to the consolidation of Nepal. Group EBITDA, meanwhile, inched higher by 1.3% while margin softened by 0.6pp to 38.3%.

Completion of Robi-Airtel merger on 16th November, where Axiata owns 68.7% of merged company. Post-merger, the merged company’s turnover is expected to grow 20%-25% (vs. Robi’s revenue) with some compression at EBITDA level (due to integration costs). Nevertheless, EBITDA is set to improve from 4Q17 onwards with positive impact to PATAMI a year later.

D&A and finance cost are expected to remain high 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 their local currencies (in key OpCos). Meanwhile, the group also expects its effective tax-rate to normalise at the corporate tax level (at c.25%-26% range) in 4Q16 and FY17.

FY16 KPIs are expected to come in lower. The uninspiring set of 9M16 results have led Axiata to revise its 2016 KPIs lower (expecting a lower annual growth rate in revenue/EBITDA vs. 12.2%/16.0% YoY previously). Its capex, meanwhile, is expected to remain high at c.RM6.0b (vs. RM5.7b previously) in view of the weak Ringgit. Moving forward, while management foresees heightened competition to remains at its key Opcos as well as currency volatility, the completion of Robi-Airtel merger and Ncell acquisition could provide synergistic opportunities.

Tweaked FY16E/FY17E core PATAMI by +2%/-26%, after fine-tuning and imputing: (i) higher D&A to RM5.2b/RM5.4b (+4%/+5%); (ii) higher effective tax rate to 25% in FY17 (vs. 18% previously), and (iii) margin compression from Robi-Airtel merger. All in all, we expect Axiata to record annual growth of 7.3%/11.8% in revenue/EBITDA growth for FY16 and 6.9%/5.0% a year later.

Source: Kenanga Research - 25 Nov 2016