9M17 results came in within expectations. Moving forward, the group is set to remain focused on driving improvements at Celcom and XL as well as continuing its group-wide cost optimisation initiatives. Post review, we tweaked our FY17/FY18E earnings forecasts marginally by <1%. Raised the stock rating to MARKET PERFORM with an unchanged SoP-derived TP of RM4.95.

In-line. 9M17 core PATAMI of RM996m (-26% YoY) came in within expectations at 71% of our and 77% of the street’s full-year forecasts. The lower YoY performance was mainly due to losses from Idea (pressure on pricing and regulatory changes (introduction of GST)), dilution from RobiAirtel merger and lower contribution from Celcom. On a reported basis, 9M17 PATAMI improved 9% YoY to RM885m as a result of improved EBITDA and forex translation gains of the current year as opposed to forex translation loss a year ago. No dividend was declared, as expected.

YoY, 9M17 revenue advanced by 15% (or 10.6% at constant currency), thanks to higher contribution from all major Opcos except Celcom (-2% to RM4.9b). The strong revenue performance was mainly driven by data segment growth with data revenue contributing 44% (vs. 33% in 9M16) of service revenue. Group EBITDA, meanwhile, improved by 14.5%, in tandem with the top-line performance coupled with group-wide cost optimization efforts, with margin stable at 38.1%. QoQ, 3Q17 turnover improved by 2.4%, mainly underpinned by higher contribution from all major Opcos other than the Cambodian and Nepal operations. Improved revenue and effective cost management resulted in EBITDA growth by 8.9%. PATAMI, however, dipped by 41% due to one-off deferred tax credit adjustment in Bangladesh in 2Q17.

Celcom’s 9M17 revenue contracted by 1.8% YoY owing to the lower legacy voice and SMS revenue. EBITDA inched higher by 0.2% to RM1.7b with higher margin of 35.3% (vs. 34.6% a year ago) due to better cost control. QoQ, its revenue advanced by 2.2% (or 1.9% in service revenue) reflecting stability in operations, and ahead of industry performance. EBITDA, however, soared by 8.4% 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 remain strong with a healthier cash balance at RM6.9b (vs. RM7.4b in 2Q17) with better gross debt/EBITDA ratio of 2.1x (2Q17: 2.27x and the optimal level of < 2.5x).

FY17 KPIs remain unchanged. 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 lower to RM6.6b (vs. RM7.1b previously) following an effective cost optimization initiative.

edotco continued to perform. edotco, a 62.4% owned subsidiary, recorded sustained growth form expansion of its portfolio and higher tenancy ratio. The division accounted for 6% and 7% of the group’s total revenue and EBITDA, respectively, in 9M17. It owns a total tower base of 16.4k across the region with 1.5x tenancy ratio (vs. 1.42x a year ago).

Moving forward, Axiata expects its India operations to continue facing intense market aggression from the new entrant into the market. Nevertheless, the group is set to remain focused on driving improvements at Celcom and XL as well as group-wide cost optimization initiatives.

Marginally tweaked FY17E/FY18E core PATAMI by <1% each, after house-keeping adjustments. Maintain our SoP-derived TP at RM4.95 but raised the stock rating to MARKET PERFORM (from UNDERPERFORM previously) as per our rating definition. 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 - 24 Nov 2017