AXIATA’s 9MFY19 core earnings of RM692.8m (-18% YoY) is deemed to be broadly within estimates. Cost rationalisation remains at the forefront of the group’s initiative to sustain profitability, in the face of competitive landscape in challenging key markets. Maintain OP with an unchanged SoP-driven TP of RM4.80.

Broadly in line. We deem AXIATA’s 9MFY19 core PATAMI of RM692.8m to be broadly in line with our/consensus expectations, making up 64% of both respective full-year assumptions. We anticipate better efficiencies from the larger OpCos (i.e. Celcom, XL) to contribute to a strong 4QFY19. No dividend was announced, as expected.

YoY, 9MFY19 turnover of RM18.32b (+4%) was driven by higher revenue across all OpCos except: (i) Celcom which registered a 9% decline likely on weaker domestic interconnect and roaming charges; and (ii) Ncell from lower international long-distance revenue. Group EBITDA came at RM7.89b (+26%) in a MFRS 16 environment, while registering a 10% expansion with pre-MFRS 16 accounting. The boost is attributed to ongoing cost initiatives. Despite this, 9MFY19 core PATAMI came in at RM692.8m (-18%) due to poorer performance from associates and other segments.

QoQ, 3QFY19 revenue came in flattish at RM6.21b (+1%). Notably, stiffer competition and lower rates affected Celcom (-2%), Dialog (-3%) and Ncell (-6%) but was offset by stronger contributions from XL (+6%). Core PATAMI was lifted by 12%, mainly due to Robi previously being dragged in 2QFY19 by the inclusion of accumulated tax repayments in conjunction to tax law changes.

Finding excellence. Competitive market environment persists to weigh in on core mobile services businesses, with migration from prepaid to postpaid being commonplace with packaged offerings to incentivise customers. For 3QFY19 (vs. 3QFY18), Celcom reported 2.98m postpaid (vs. 2.90m) and 5.64m prepaid (vs. 6.34m) customers, with a higher blended ARPU of RM52/mth (vs. RM48/mth). XL continued to enjoy gains from its ex-Java expansion which is tightly held by leader Telkomsel, bringing fresh alternatives to the markets there. Other OpCos are also demonstrating growth in userbase while edotco has officially set foot in Laos. On guidance, while revenue growth is likely to be below the initial 3- 4% target, management indicated that its pre-MFRS 16 EBITDA growth target of 5-8% is likely to be exceeded (having done 10% so far). This means that there is further room for improvement to be enjoyed from its cost rationalisation efforts. The group’s recent tying in with Maxis sets to ensure the group stays prepared for the eventual deployment of 5G, albeit hanging on the allocation of the required spectrums. Nonetheless, the combined resources should enable an accelerated roll-out of 5G within the country, especially with MAXIS already collaborating with Huawei in building a 5G network.

Post-results, our FY19E/FY20E earnings remain mostly unchanged.

Maintain OUTPERFORM and SoP-driven TP of RM4.80. Our SoPdriven TP implies a 5.6x FY20E EV/Fwd EBITDA, which is -1.5SD below the stock’s 3-year average. We continue to believe that sentiment for AXIATA will remain clouded following the cancellation of the merger with Telenor. However, we see a tactical opportunity as the group is in the spotlight on talks of smaller sized deals. Even if this does not come to pass, we opine its growing regional foothold and cost savings-driven initiatives beyond FY19 could be safe bet for investors, post FY18’s noisy year of impairments and adjustments

Source: Kenanga Research - 29 Nov 2019