1Q19 results came below expectations, due mainly to the lower-than-expected Celcom’s contribution. 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. Post review, we have trimmed our FY19-20E earnings by 5%/3%, respectively. Maintain MARKET PERFORM with an unchanged SoP-derived TP of RM4.30.

Below expectations. 1Q19 core PATAMI of RM209m (-33% YoY) came in below expectations at 20%/17% of our/street’s full-year estimation. The key negative deviation from our end was mainly due to the lower-thanexpected Celcom’s contribution. Note that, our core 1Q19 PATAMI was derived after removing: (i) forex gains of RM92m, (ii) XL gain on disposal of towers of RM20m, (iii) RM113m gain on disposal of M1, (iv) RM302m gains on divestment of non-core digital business, and removing RM28m on other adjustments, tax & MI.

YoY, 1Q19 revenue improved by 3.5% driven mainly by better performance from all OpCos apart from Celcom (-7% due to lower wholesale revenue) and Ncell (-10%, no thanks to the implementation of Telecommunication Services Charges from mid of July-2018 and a drop in international long-distance business). At constant currency of 1Q18, revenue grew 4.3% on the back of higher data revenue. EBITDA, meanwhile, advanced by 19% as a result of the adoption of MFRS 16. Stripping off the MFRS 16 impact, EBITDA grew 7.7%. PATAMI improved significantly from a loss position a year ago due to the gain on disposal of non-strategic investments and discontinuation of related losses from investment in India. QoQ, turnover dropped by 5%, mainly attributed to the lower contribution from most of the OpCos. EBITDA grew by 740bps to 40.7%, due to the adoption of MFRS 16 and lower OPEX. Axiata’s balance sheet, meanwhile, remained healthy with gross debt/EBITDA of 2.73x in 1Q19 (or 2.21x if measured at the pre-MFRS 16 level vs. 2.29x in 4Q18) while cash balance boosted to RM6.8b lifted by M1 proceeds of RM1.65b.

Celcom’s 1Q19 revenue declined by 7% YoY as the higher mobile service revenue (+2.3%, thanks to stronger postpaid growth) was not enough to offset the reduced wholesale revenue. Despite EBITDA growing 25% to RM570m (due to adoption of MFRS 16), PAT has dipped 24% as a result of higher D&A expenses. Excluding MFRS 16 impact, EBITDA would be lower by 4.4%.

edotco continued to perform and recorded sustained growth form expansion of its portfolio as well as a higher tenancy ratio. The division accounted for 7.4% and 9.4% of the group’s total revenue and EBITDA, respectively, in 1Q19. It owns a total tower base of 18.8k across the region with 1.62x tenancy ratio (vs. 1.59x a year ago).

Maintained FY19 KPIs. Axiata is keeping its KPIs unchanged and expects to record 3-4% revenue growth (based on constant currency of 1 USD=RM4.034, and pre-MFRS 16) 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, we understand that management is aiming to emphasize on profitable growth and cash focus in FY19-20 via adopting various cost transformation, network monetization and digitalization plans.

Maintain MARKET PERFORM call with an unchanged SoP-derived TP of RM4.30. We have trimmed our FY19-20E PATAMI by 5%/3% after lowering our Celcom revenue forecast and fine-tuning the Group’s OPEX assumptions. Our SoP-derived TP, however, remain unchanged at RM4.30, implied a -0.5x EV/Fwd. EBITDA below its 5-year mean.

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

Source: Kenanga Research - 29 May 2019