Axiata announced disappointing set of results and dividend for FY16. Its dividend pay-out ratio, meanwhile, is expected to stay low over the next two-year as a result of adopting a more prudent and strategic approach. Post results review, we lowered our FY17E earnings by 9% and believe the group may face another tough year ahead as a result of heightened competition, tax and regulatory uncertainties in its key OpCos. With limited catalyst ahead, we downgrade our Axiata call to UNDERPERFORM (from MARKET PERFORM previously) with lower TP of RM4.30 (from RM4.81 previously) based on a lower targeted FY17 EV/forward EBITDA of 4.5x, representing a 2SD below its two-year mean.

Hit by high forex volatility. FY16 core PATAMI of RM1.4b (-32% YoY) came in below expectations at 87%/86% of ours/consensus’ full-year estimate due mainly to the weak Celcom and Robi performance as well as higher-than-expected D&A expenses. On a reported basis, its PATAMI plunged by 80% YoY to RM504m impacted by: (i) forex loss, (ii) M&A related costs, and (iii) underperformance of some OpCos and Associates.

Declared a lower-than-expected final dividend of 3.0 sen, bringing its full-year DPS to 8.0 sen (vs. FY15: 20 sen and ours 18.0 sen), implying a dividend pay-out ratio of 50% (vs. 84% in FY15). The sharp decline in pay-out ratio was due mainly to its prudent and strategic reasons where the group intends to preserve cash for capex investment as well as sailing through the high forex volatility. Moving forward, management intends to keep its dividend pay-out ratio at c. 50% before resuming its previous trend in FY19. Note that, Axiata has set a dividend policy in 2010 where the group intends to reward at least 30% of its PATAMI to shareholders and endeavours to progressively increase the pay-out ratio over the time.

YoY, revenue advanced by 9% mainly driven by Nepal consolidation and Dialog operation. On a constant currency basis, the revenue growth rate would have increased by 5.4%. Group EBITDA, meanwhile, improved by 10% with margin enhanced by 60bps to 37.2% as a result of the Nepal contribution. QoQ, turnover improved by 6% (or 2.2% at constant currency) with all the segments registering positive growth. Group EBITDA, however, dipped by 5% with margin softening by 410bps to 34.2%, no thanks to the higher direct and market expenses. Its PATAMI, meanwhile, plunged into the negative territory of RM309m, no thanks to the higher D&A (due to network modernization in XL and Robi), net finance cost and forex translation losses.

Celcom’s service revenue dipped by c.10% YoY (to RM6.0b) in FY16 as a result of declining voice, VAS and overseas foreign workers segment. Total subscriber base, meanwhile, shrunk to 10.6m (vs. 12.2m a year ago) by end-FY16 after losing 1.7m net subscribers’ add (mainly in the prepaid segment). EBITDA, however, improved by 4% to RM2.6b but with lower margin of 34.8% vs. 37.1% in FY15.

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, Axiata is also working towards group-wide cost management, which target to save RM2.3b (RM800m (in FY17) and RM1.5b (in FY18 & FY19)) in both OPEX and CAPEX.

FY17 KPIs. Axiata has introduced its FY17 KPs, where the group targets to achieve revenue/EBITDA annual growth rates of 9%-11%/7%-9% (based on 1USD=RM4.55). Its capex, meanwhile, is expected at RM6.6b (FY16: MR6.4b).

Tweaked FY17E core PATAMI by -9%, after some housekeeping and management’s latest guidance into consideration. Meanwhile, we also take this opportunity to introduce our FY18E numbers.

Source: Kenanga Research - 24 Feb 2017