AXIATA’s 1HFY22 results met our expectations. Its mobile subscription and ARPU very much improved across the region as economies reopened. We continue to like AXIATA for: (i) its strong foothold in the growing telco markets in the region, (ii) its dominant position in the telco tower sector in the region via edotco, and (iii) the strong execution of its M&A strategy. We maintain our forecasts but tweak our SoP-derived TP up to RM3.65 (from RM3.45). Maintain OUTPERFORM.

Met our forecast, beat market expectations. 1HFY22 core PATAMI of RM702m (excluding forex losses) came in at 55% each of our full-year forecast and the full-year consensus estimates. We consider the results within our forecast but beat market expectation. AXIATA did not declare an interim dividend as usual due to the prevailing macro-economic headwinds.

Results’ highlights. 1HFY22 revenue improved 6% YoY underpinned by a strong recovery at both its domestic and regional operations, specifically Edotco (>+100% to RM1.2b), Dialog (Sri Lanka) (+22% to RM1.7b), and XL Axiata (Indonesia) (+8% to RM4.0b). EBITDA growth outpaced revenue at 8% YoY while margins improved slightly by 1ppt to 45% despite rising inflationary pressures in 2QFY22. All its operating companies showed improvement with the exception of Dialog and Ncell (Nepal) which declined 1% and 10%, respectively. Celcom and Edotco led the way with 14% and 32% growth, respectively. Core PATAMI surged 35% YoY with Celcom being the main driver, growing at 76% (1HFY21: 46%) partly offset by Cukai Makmur. Dialog and Edotco reported a decline in PATAMI, falling 36% and 35%, respectively, on account of forex losses and higher funding cost, with the latter incurring higher funding costs following incremental debt for recent acquisitions in Malaysia and the Philippines.

Mobile subscription improved across all Axiata’s telcos with Dialog leading the way growing 12% YoY followed by Robi (Bangladesh) at 5% YoY. Celcom saw a 3% YoY uptick driven by its postpaid subscribers (+5% YoY). Similarly, blended ARPU saw improvement across all of its operating companies, reversing the downtrend from the last two quarters.

The key takeaways from the results briefing are as follows:

1. AXIATA believes that there is a good chance that its revenue and EBIT growth could beat its guidance for mid single-digit and high single-digit, assuming no further deterioration in the macroeconomic outlook and the global chip shortages will soon be behind us.

2. The mandatory tender offer for the remaining 34% stake in Link Net, and 66% stake in XL Axiata (a provider of high-speed broadband and cable TV in Indonesia), is expected to be completed in October 2022, while XL Axiata’s rights issue is slated for completion by November 2022. Meanwhile, edotco’s acquisition of tower assets in the Philippines is progressing well with 1,500 towers (out of total 2,973) having been transferred as at June 2022. The Celcom-DIGI merger is on track for completion in 2H 2022.

3. Amidst a national crisis, AXIATA is reinventing its operations in Sri Lanka by focusing on growing Dialog’s topline and restructuring its balance sheet. On a positive note, the regulators have approved price hikes for telco services (+20%) and paid-TV (+25%) for all operators, paving the way for a recovery in margins for Dialog in 2023.

4. There was no update on the Digital Nasional Bhd (DNB) stake deals.

We continue to like AXIATA for: (i) its strong foothold in the growing telco markets in the region, (ii) its dominant position in the telco tower sector in the region via edotco, and (iii) the strong execution of its M&A strategy, having concluded major acquisitions in Indonesia and the Philippines recently.

Forecasts. We maintain our forecasts but tweak our SoP-derived TP up to RM3.65 (from RM3.45) for house keeping reasons (see Page 4). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our call include: (i) the Celcom-DIGI merger falls through, (ii) unfavourable terms with regards to the 5G rollout in Malaysia, and (iii) risks associated with overseas operations.

Source: Kenanga Research - 29 Aug 2022