We deem the recent 1H19 core earnings of RM437.6m (-17%) and 5.0 sen dividend to be within expectations. Merger plans are indicated to remain on track, marked to be finalised by Nov. The group could continue to reap fruit from its cost transformation, network monetization and digitalization plans. Upgrade to MP with a higher SoP-driven TP of RM4.80 (from RM4.55).

Broadly in line. We deem AXIATA’s 1H19 core PATAMI of RM437.6m to be broadly in line with our/consensus expectations, making up 42%/39% of respective full-year assumptions. 2H19 is expected to be stronger on the back of better efficiencies from the larger OpCos (i.e. Celcom, XL, NCell). An interim dividend of 5.0 sen was declared, which we deem to be within our FY19E 10.0 sen payout.

YoY, 1H19 top-line grew by 4% to RM12.10b, led by higher revenue across all OpCos, aside from: (i) Celcom, which fell by 8% on weaker domestic interconnect and domestic roaming numbers, and (ii) Ncell from changes in Nepal’s Telecommunication Service Charges and slowing international long-distance revenues. Meanwhile, group EBITDA saw a 25% growth to RM5.09b in a MFRS 16 environment. On a pre-MFRS 16 basis, EBITDA still increased by 11%, thanks improvements in cost efficiency. However, 1H19 normalised PATAMI registered at RM437.6m (- 17%), mainly dragged by expanding losses from associates and other segments.

QoQ, 2Q19 revenue stood at RM6.15b (+3%) as all OpCos demonstrated slow but steady expansion. This translated to a core PATAMI of RM228.8m (+10%), boosted by better results from Celcom (+64%) and XL seeing black once again after five consecutive quarters of losses.

Set in course. Revenue streams for the group could still see some volatility, with local Celcom operations experiencing a migration of prepaid customers to postpaid. Meanwhile, XL appears to be seeing returns from its investments in expanding its ex-Java presence. This should be supported by the group’s network upgrades for continual growth in network capabilities and coverage. This aside, we take comfort in OpCos demonstrating more sturdy cost management, which paints a rosier longerterm outlook for the group. Additionally, management is hopeful that its digital arms could start raking in profits by this year. On its FY19 targets, management remains first on its revenue growth guidance of 3-4% is now confident that it could exceed the previous EBITDA growth guidance of 5- 8%. With regards to the merger with Telenor, management indicated that plans are still on track, having already completed 70% of the due diligence process. The finalisation and signing of the deal could be sealed in Nov 2019.

Post-results, we made minor tweaks to our FY19E/FY20E numbers as we incorporate 2Q19’s results numbers.

Upgrade to MARKET PERFORM with a higher SoP-driven TP of RM4.80 (from RM4.55). The higher TP is mainly derived Celcom’s longerterm contributions assuming it could stay firm with its enhanced cost efficiencies in the longer term. This implies a 5.6x FY20E EV/Fwd EBITDA valuation, which is close to the stock’s 3-year mean. Note that we refrained from incorporating any synergies from the upcoming merger with Telenor Asia at this moment, owing to the lack of clarity on the net improvements between the two companies.

Risks to our call include: (i) higher/lower-than-expected revenue from OpCos; (ii) stronger/weaker-than-expected operating margins; and (iii) regulatory changes in countries of operations.

Source: Kenanga Research - 30 Aug 2019