2018 was a year of massive portfolio rationalisation and monetisation. Moving forward, Axiata is set to emphasize on profitable growth and cash focus in FY19-20 via adopting various cost transformation, network monetization and digitalization plans. Downgrade the stock rating to MARKET PERFORM with an unchanged SoP-derived TP of RM4.35.

Below our but above the distorted consensus’ estimate. FY18 core PATAMI of RM824m (-32% YoY) came in below our (at 92%) but above the distorted consensus’ expectation (at 147%). A 4.5 sen dividend was announced, bringing the full-year DPS to 9.5 sen (85% payout; vs. our 10.0 sen estimate). The key negative discrepancy from our end was mainly due to higher OPEX and D&A charges. Note that, our core FY18 PATAMI was derived after adding: (i) forex losses of RM481m, (ii) Idea’s share of losses and loss on dilution of RM3.9b, (iii) legacy assets write-off & accelerated depreciation of RM1.8b and (iv) loss on dilution on non-core digital of RM90m; and removing: (i) RM80m of XL’s gain on disposal of assets as well as (ii) RM126m on other adjustments, tax & MI.

YoY, FY18 revenue weakened by 2% due mainly to the impact from MFRS 15 adoption and forex translation. EBITDA dropped 10% to RM8.3b with margin lowered to 34.9% (vs. 37.8% a year ago). PATAMI, however, was impacted by externalities and one-off non-cash items, such as Idea-related transactions (RM3.9b), asset write-offs (RM1.8b), forex and derivatives losses (RM0.5b). At constant currency, revenue grew 6.2% driven by better performance from Celcom, Dialog and Edotco, while EBITDA remained stable. QoQ, turnover improved by 4%, underpinned by higher contribution from all OpCos, except Dialog. EBITDA dipped by 290bps to 33.3%, due to higher OPEX. PATAMI plunged into the red territory, impacted by one-off assets written off/accelerated depreciation amounting to RM1.8b. Axiata’s balance sheet, meanwhile, remained healthy with gross debt/EBITDA of 2.29x in 4Q18 (3Q18: 2.34x). In-line with internal guidelines, c.50% of RM19.1b debt was USD-denominated (of which c.50% was hedged); and 67% of debt on fixed rate as of end-4Q18.

Celcom’s FY18 revenue improved by 11% YoY due to solid prepaid and device revenues. Celcom’s focus on high-value customers, simplified product offerings as well as improved sales distribution had performed well in 1H18 but started to show some weaknesses in 2H18 with group’s subscriber base inverted to the declining trend to close at 9.1m (vs. marginal gain in the 1H18; FY17: 9.5m) after losing 639k (to 6.1m) prepaid subscribers for the full-year. Despite a lower subscriber base, its service revenue merely dropped marginally by 0.4%, thanks to higher Prepaid ARPU (+RM2 to RM36) and stable Postpaid ARPU of RM87. EBITDA, meanwhile, weakened by 18% due to the adoption of MFRS 15 and higher OPEX.

Introduced FY19 KPIs. Axiata is expected to record 3-4% revenue growth (based on constant currency of 1 USD=RM4.034, and pre-MFRS16) in FY19 (underpinned by better XL, and Robi’s performance) with EBITDA aimed to improve by 5-8%. Capex is expected to come in at c.RM6.8b (vs. RM6.1b in FY18) with key focus on strengthening its network in all OpCos. All in, management is set to emphasize on profitable growth and cash focus in FY19-20 via adopting various cost transformation, network monetization and digitalization plans.

Downgrade to MARKET PERFORM call (in view of the limited capital upside from here) with unchanged SoP-derived TP of RM4.35 after tweaking our FY19 numbers by 8% post incorporating the FY18 results and OPEX assumptions. Besides, we also introduced our FY20 numbers and update the forex assumptions as well as shifting the valuation based year to FY19 under our SoP valuation computation.

Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility while upside risks are: (i) stronger- than-expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 25 Feb 2019