AXIATA hosted an analyst teleconference which left us feeling slightly cautious. Respective regional movement controls due to Covid-19 is likely to impede performance with delays in capex deployment, possibly showing some recovery at end-May 2020. On going cost streamlining should cushion some adversities forthe year and better position the group for FY21. We reassess our assumptions and cut earnings by 15%/10% on more conservative FY20E/FY21E assumptions. Downgrade to MP and SoP-driven TP to RM3.55 (from RM3.85).

Region on lock. The Covid-19 pandemic posed many socio-economic implications with movement restrictions leading to slower economic progress and loss of income. Concerns are directed at lower affordability inducing higher-than-usual subscriber churns. With that, the group presented a comprehensive revenue risk assessment on the mobile industry in its regional footprint, highlighting potential issues and exposures of its OpCos. We gathered that NCell could be sensitive to this, given Nepal’s high dual sim penetration (above 90%) and prepaid mix, which is not entirely surprising. On the flipside, the assessment shows that Indonesia could be less at odds with the ongoing landscape, but which we are also cautious on, given highly competitive pricing there, even prior to Covid-19. ARPU could also take a hit given most government’s initiatives to provide free data during movement restrictions. Asides from Malaysia’s free 1GB data, Sri Lanka (Dialog) and Nepal (NCell)) also introduced mobile data relief to ease consumer connectivity during the last few months. That said, it is believed that overall, the mobile industry could see revenue declining in the low-to mid single digit YoY with some allay expected to be seen from end-May when controls were relaxed.

More bricks against the wind. In anticipation of near-term challenges, the group seeks to enhance its convergence play by being more active in the fixed broadband scene. However, we do not anticipate this segment to be a meaningful portion of group revenue for the time being. On the cost front, the group opines that it is doing well in identifying further cost efficiency in its 5-year cost excellence journey. In the immediate term at least, we could expect the industry to incur less marketing spend from the lack of acquisition activity. While some capex spend for the year has been deferred due to movement restrictions, we believe network enhancement and deployment should be mostly uninterrupted for the rest of the year.

Post-update, we further trim our FY20E/FY21E earnings assumptions by 15%/10% to account for a possibly more challenging-than-expected 2QFY20 period. This came from more conservative expectations in subscriber numbers across all regions with some dilution of ARPU from downtrading. Although the group has not provided an update on its FY20E guidance, our new estimates translate to a decline in YoY revenue and EBITDA by 9% in FY20. (refer to the overleaf for our preview of 2QFY20 results)

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower SoP driven TP of RM3.55 (from RM3.85). Our SoP-driven TP implies a 4.5x FY21E EV/Fwd EBITDA, which is -1.5SD below the stock’s 3-year average. The derating marks a reversal from our recent tactical upgrade in our 25 June 2020 piece, where the stock might now also presents less attractive technical trading opportunity. In light of a new set of expectations from the release of its peer’s 2QFY20 results, we believe investors too might be more wary on the near-term outlook of the stock. That said, positive re-rating could come in the form of further monetisation and value unlocking of assets

Source: Kenanga Research - 17 Jul 2020