AXIATA’s 9MFY22 results beat expectations. Its mobile subscription and ARPU improved domestically and across the region as economies reopened. We raised our FY22-23F net profit forecasts by 7-6%, lift TP by 7% to RM3.90 (from RM3.65) and maintain our OUTPERFORM call.

Above expectations. 9MFY22 core net profit of RM1.07b (excluding forex losses) came in above expectations at 84% and 86% of our full year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from the stronger-than-expected performance from regional markets, especially, Sri Lanka. A DPS of 5.0 sen was declared, implying a payout ratio of 43% which was lower than our forecast of 86% or a DPS 12.0 sen.

Results’ highlights. 9MFY22 revenue improved 8% YoY underpinned by a strong recovery at both its domestic and regional operations, specifically Edotco (>+100% to RM1.8b), Dialog (Sri Lanka) (+19% to RM2.6b), Smart (Cambodia) (+12% to RM1.2b) and XL Axiata (Indonesia) (+9% to RM6.2b). Earnings before interest, tax and depreciation growth outpaced revenue at 10% YoY while margins improved slightly by 1ppt to 45% despite inflationary pressures. All its operating companies showed improvement in earnings before tax, interest and depreciation with the exception of Dialog, Smart and Ncell (Nepal) which declined 5%, 2%, and 13%, respectively on higher inflationary pressure) with Celcom and Edotco leading the way in improvement with 13% and 41% growth, respectively. Core net profit surged 18% YoY with Celcom being the main driver, growing at >+100% (9MFY21: +67%) partly offset by Cukai Makmur. Dialog and Edotco reported a decline in PATAMI, falling 48% and 55%, 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 continued to be resilient across all Axiata’s telcos with Dialog leading the way, growing 11% YoY and 1% QoQ, followed by Ncell at 4% YoY and 2% QoQ. Similarly, blended ARPU saw improvement across all its operating companies, reversing the downtrend from the last two quarters.

The key takeaways from the results briefing are as follows:

1. Seeing strong momentum regionally, AXIATA reiterated that there is a good chance that its revenue and EBIT growth could beat its guidance for mid-single-digit and high single-digit while a capex of RM7b is still on track.

2. Its gross debt rose to 3.2x (from 3.0x in June 22) but AXIATA is confident that the number will fall below 3x post the Celcom-Digi merger transaction (where AXIATA will receive RM2.4b cash from DIGI as well as the repayment of inter-company loan of RM2b from Celcom). At present, about 48% if its debts are ringgit-denominated with the balance in USD of which 32% are unhedged. Also of its total debt, 65% are fixed loans (vs. 43% three months ago) and 28% are of short-term maturity (vs. 38% three months ago).

3. AXIATA sensed that the political and economic situation in Sri Lanka has been improving since Aug 2022. Economic activities are normalising with tourist arrivals picking up since Nov 2022. Despite the price hikes in Sep 2022, the demand for Dialog’s telco services have been picking up. In fact, Dialog is gaining market shares in all segments thanks to its attractive offerings and superior network.

We raise our FY22F earnings by 7% and FY23F earnings by 6% on account of strong performance from its regional operating companies but keep earnings before interest tax and depreciation margins at 46% on account of inflationary pressures.

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.

Correspondingly, we raise our SoP-derived TP by 7% to RM3.90 (see Page 5). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 6).

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 Nov 2022