Axiata’s 1H17 results came in within expectations but sprung a higher dividend surprise. Moving forward, heightened competition, tax and regulatory uncertainties in its key OpCos remain key challenges for the group. Post review, we have raised our FY17/FY18E earnings forecasts by 2% each. MARKET PERFORM maintained with unchanged SoP-derived TP of RM4.80.

Within expectations. 1H17 core PATAMI of RM644m (-23% YoY) came in within our (at 48%) and the street’s full-year forecast (at 46%). The lower YoY performance was mainly due to lower performance from Celcom, dilution from Robi-Airtel merger and Idea loses. On a reported basis, 1H17 PATAMI improved 16% YoY to RM646, thanks to higher contribution from Ncell and Smart, improved EBITDA and forex translation gain. A higher-than-expected 5.0 sen interim dividend (vs. 3.0 sen) was announced, along with the dividend reinvestment scheme (where the details will be determined and announced in due course).

YoY, 1H17 revenue advanced by 16% mainly driven by higher contribution from all major Opcos except Celcom (-3% to RM3.2b). On a constant currency basis, the revenue growth rate increased by 10.5%. Group’s EBITDA, meanwhile, improved by 12%, in tandem with the top-line performance, with margin decreasing marginally by 110bps to 37.1%. QoQ, 2Q17 turnover improved by 3.0% (or +4.8% at constant currency), mainly underpinned by higher contribution from all major Opcos except the Cambodian operations. Group’s EBITDA, however, improved 6% with margin advancing by 90bps to 37.5%, thanks to effective cost management.

Celcom’s 1H17 revenue was lowered by 3.4% YoY owing to the lower legacy voice and SMS revenue. EBITDA dipped by 8.3% to RM1.1b with lower margin of 34.2% (vs. 36.0% a year ago) due to higher network & staff cost. QoQ, its revenue inched higher by 0.5% reflecting stability in operations. EBITDA, however, advanced by 7.5% due to higher revenue with lower costs as a result of internal cost optimization initiatives.

Improved balance sheet. The group’s balance sheet continued to strengthen resulting in healthier cash balance at RM7.4b (vs. RM6.4b in 1Q17) with better gross debt/EBITDA ratio of 2.3x (1Q17: 2.4x and the optimal level of < 2.5x).

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=RM4.30). Its capex, however, has been revised upward to RM7.1b (vs. RM6.6b previously) followed higher allocation for Robi and XL to expand their network coverages.

Expanding telco tower portfolio in Pakistan. In a separate announcement, Axiata’s 62.4% owned subsidiary – edotco, has entered the Pakistani market with a combined asset portfolio of c.13.7k towers through Tanzanite and the proposed acquisition of Deodar (with a combined total enterprise value of USD1.0b). Management highlighted that the deal is expected to provide immediate earnings accretion to Axiata and would improve its FY16 revenue/EBITDA/PATAMI by 6.2%/6.9%/3.2%, respectively. Please refer to today’s separate Axiata report for details.

Raised FY17/FY18E core PATAMI by 2% each, after house-keeping adjustments. We have yet to impute the above-mentioned proposed acquisition by edotco into our model in view of the limited financial information available at this juncture. Maintained MARKET PERFORM with an unchanged SoP-derived TP of RM4.80. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; upside risks are: (i) stronger-than-expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 5 Sept 2017