Axiata’s FY21 CNP beat expectations and regional OpCos should see continued subs growth to drive earnings growth. Management will also resort to more M&A to drive growth in its enterprise segment. Its digital businesses continue to show improving profitability, which we think will continue to improve with greater scale. Post results, we maintain our FY22 earnings estimates, which sits closely with management’s guidance. We maintain our OP call with unchanged TP of RM4.30, and remains our sector Top Pick for its regional and digital OpCos.

Earnings beat. 4QFY21 CNP of RM411m brought FY21 CNP to RM1.33b, beating our and street's expectations at 110% and 109% of estimates. The outperformance was mainly due to lower-than-expected costs as its revenue projections were in line. 4QFY21 DPS of 5.5 brings FY21 to 9.5 sen, beating our 9.0 sen estimate.

YoY, CNP jumped 53% mainly lifted by XL, Dialog and edotco. Revenue rose 7% as all OpCos registered revenue growth, save for NCell, which is still suffering from Nepal's prolonged lockdown. Celcom posted an impressive turnaround in FY21 while XL fared well with 3% revenue growth despite the stiff competition in 2021. Robi and Dialog both posted postpaid and prepaid subs growth. QoQ, earnings rose 4% on 6% revenue growth, lifted by all OpCos, save for Robi and Dialog.

Regional OpCos (save for Nepal) have been registering continuous subs growth, which we think will continue to outweigh any softening ARPUs, to continue driving earnings growth. Celcom's turnaround should continue to prove fruitful in 2022, and XL will take advantage of (i) LinkNet convergence proposition, (ii) easing competition in Indonesia, and (iii) Hutch/Indosat merger-period to acquire more subs. NCell should see a gradual recovery in subs after lockdowns are eased.

M&A to grow enterprise. Beyond just executing existing Celcom Digi merger, XL's integration with LinkNet, and edotco's acquisition of Touch Mindscape, Axiata is still looking to merge or acquire more assets across its region, mainly to strengthen its enterprise segment. Management thinks it's impossible to organically grow the segment from its current 7-8% of revenue to its 2024-target of 20% of revenue, and is thus active at the deal table. The M&As will be focused on growing its enterprise customer base, talent and capabilities.

Digital Businesses. FY21 saw a 94% jump in revenue to RM980m while profitability improved, recording a net loss of RM112m (vs FY20: RM295m). We expect Boost's gross transaction value and number of users and merchants to continue growing as enterprises continue to go digital. Boost's potential Digital Banking License win would allow it to lower its cost of funding and introduce new banking and financial products. ADA's revenue jumped 89% YoY on clients' digital transformation initiatives, which we expect to continue in coming years.

Guidance. After beating its FY21 revenue and EBITDA growth guidance of low-single-digit growth by 7% apiece, management is guiding FY22 to see revenue growth of mid-single-digit and EBIT growth of high-single-digit.

Post results, despite the earnings beat, we maintain our FY22E CNP, as it closely aligns with FY22 guidance, and introduce FY23E CNP of RM1.38b, implying a 7% growth.

Maintain OUTPERFORM with unchanged TP of RM4.30. This set of results strengthens our thesis that Axiata has a lot going for it in its regional and digital businesses, making the stock a good hedge against the uncertain operating environment for local MNOs. Besides, it is still our Top Pick for the Telco sector, as it has the best long-term value proposition against its industry peers.

Source: Kenanga Research - 23 Feb 2022