AXIATA’s 1HFY23 results disappointed. It dipped into the red due to higher depreciation and finance costs. Operationally, both its revenue and EBITDA met expectations thanks to resilient subscriber growth and ARPU. We now project a loss in FY23F (vs. a profit previously) and cut our FY24F earnings forecast by 35%. We reduce our TP by 14% to RM3.60 (from RM4.18) but maintain our OUTPERFORM call.

It disappointed with a core net loss of RM499m in1HFY23 (excluding RM396m charge on receivables following the unfavorable outcome of its arbitration proceedings in Nepal on capital gains tax), vs. our our full-year net profit forecast of RM873m and the full-year consensus net profit estimate of RM1.2b.

The variance against our forecast came largely from higher-than expected depreciation and amortisation (mainly from Edotco, Robi and LinkNet) and funding cost, and impairments (Ncell).

Nonetheless, it still declared a 5.0 sen DPS, on track to deliver the 10.0 sen total dividend it has committed for FY23.

Results’highlights. YoY (after discontinuing Celcom’s operations), 1HFY23 revenue improved 12% (accounting for 50% of our full-year estimates), underpinned by a strong recovery in domestic and regional operations. Revenue was underpinned by XL Axiata (+12%), Dialog (Sri Lanka at 20%, Robi (Bangladesh) at 19% and Edotco at 19%. EBITDA declined 2%, dragged by higher operational and network costs (mostly from Dialog).A one off loss (Axiata booked in a write-off of RM396m from NCell) which dragged profit before tax to RM936m. In terms of earnings, all its operating OpCos disappointed with the exception of XL Axiata (+25%), Robi (+35%), and Smart (Cambodia) which saw a 23% uptick in earnings.

Its mobile subscription was mixed across all Axiata’s telcos with Dialog leading the way, growing 6% YoY but down 1% QoQ, followed by Robi at +3% YoY and +1% QoQ. Ncell saw its subscription declined by 1% YoY and QoQ but Similarly, blended ARPU saw improvement or stayed stable across all its operating companies, with the exception of Ncell which saw a rebound to RM188 from RM176 in the last reporting quarter.

The key takeaways from its results briefing are as follow;

1. AXIATA reiterated its guidance of revenue growth of mid-single-digit and EBIT of high single-digit. It revised its capex to RM6.5b – RM6.8b (from RM7.1b initially guided) as it rationalised expenditure due to the high borrowing costs and weak MYR.

2. Its gross debt to EBITDA stood at 3.7x (1Q23: 3.8). Net debt to EBITDA improved to 3.06x (1Q:23: 3.23x). Debts were reduced by RM1.9b in 1HFY23 with another RM0.5b in 2HFY23. Adjusting for CDB dividend, net debt to EBITDA stands at 2.92x. Cash balance is still healthy, up by 15% to RM6.3b. AXIATA maintained its commitment for a gross debt to EBITDA of <3.0x for the next few years.

3. To lower its gross debt to EBITDA, AXIATA intend to: (i) part-divest its stake in Edotco, (ii) turn XL Axiata into a fibreCoon JV with other investors; and (iii) grow the EBITDA of its mobile and infra units.

4. Axiata is looking forward to the Dialog + Airtel merger. Although it’s a non-cash deal, the merger will improve its market structure in Sri Lanka. Currently Dialog is one of Sri Lanka’s largest telecommunications company but the largest mobile network operator.

Forecasts. We now project a loss in FY23F (vs. a profit previously) and cut our FY24F earnings by 35%.

Correspondingly, we reduce our SoP-derived TP by 14% to RM3.60 (from RM4.18) largely to reflect the poor results and the rationalisation of our EV/EBITDA multiple for XL Axiata to 4x (from 5x) to be more in line with its historical average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 5).

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. Maintain OUTPERFORM.

Risks to our call include: (i) unfavourable terms with regards to the 5G roll-out in Malaysia, and (ii) risks associated with overseas operations.

Source: Kenanga Research - 30 Aug 2023