Axiata’s 1Q17 results came in within our expectation but below consensus. No dividend was announced, as expected. Moving forward, heightened competition, tax and regulatory uncertainties in its key OpCos remain the key challenges for the group. Post review, we have tweaked our FY17/FY18E earnings forecast lower marginally. Likewise, we have lowered our SoP-driven TP to RM4.70 (from MR4.78 previously) but raised the stock rating to MARKET PERFORM in view of the limited downside from here.

In-line. 1Q17 core PATAMI of RM291m (-37% YoY) came in within our full-year estimate (at 22%) but below street’s forecast (at 18%). Note that, the core PATAMI was derived after adding RM83m normalized performance from Robi, Smart and XL but removing the RM8 forex gain and RM24m gained on disposal of towers from XL. On a reported basis, its PATAMI dived 35% YoY to RM239m impacted by (i) higher D&A and finance costs, and (ii) lower contributions from Celcom, Robi and share of losses from Idea.

No dividend was declared during the quarter, as expected. For the full financial year, we expect Axiata to declare 7.0 sen DPS, translating into a dividend yield of 1.4%.

YoY, revenue advanced by 17.4% mainly driven by higher contribution from Smart as well as Ncell and Robi consolidation. On a constant currency basis, the revenue growth rate would have increased by 12.4%. Group’s EBITDA, meanwhile, improved by 15%, in tandem with the top- line performance, with margin decreased marginally by 80bps to 36.6%. QoQ, turnover inched higher by 1.6% (or flat at constant currency), mainly underpinned by higher contribution from Robi and XL. Group’s EBITDA, however, improved 9% with margin advanced by 240bps to 36.6%, thanks to the lower OPEX in Nepal, Cambodia and Sri Lanka. Its core PATAMI, meanwhile, improved to RM291 (vs. RM78m in the preceding quarter) due mainly to unprecedented forex translation losses in 4Q16.

Celcom: EBITDA margin stayed weak. 1Q17 service revenue lowered by 3.2% QoQ from the traditional strong 4Q (to RM1.47b) in 1Q17. Prepaid segment continued to stay under pressure due to subscription loss (-296k to 7.3m) and lower ARPU (-RM1 to RM30). EBITDA, meanwhile, dipped by 9% to RM1.6b with lower margin of 33.0% (vs. 35.6% in the preceding quarter) due to higher staff cost and direct expenses.

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).

FY17 KPIs stayed. Axiata reiterated its FY17 KPs, where the group is targeting 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 FY17/FY18E core PATAMI by -1.6%/-0.5%, after factoring (i) lower XL contribution (followed the uninspiring 1Q17 result), (ii) the disposal of 10% interest of Smart to Mitsui, (iii) as well as some house- keeping adjustments. Correspondingly, we have lowered our SoP-driven TP to RM4.70 (from RM4.78 previously). Our stock rating, however, has been raised to MARKET PERFORM from UNDERPERFORM as the potential downside appear limited from here (<-5%). Key downside risks include keener competition, tax and regulatory challenges; upside risk is stronger-than-expected recovery at Celcom and XL.

Source: Kenanga Research - 26 May 2017