AXIATA's 9MFY24 results exceeded expectations, mainly due to the extension in useful life of Edotco's towers. Additionally, the impact of flooding and mobile service shutdown at Bangladesh was less severe than anticipated, mitigated by increased data usage. We raised our FY24-25F earnings by 11-10%, but lowered our TP by 5% to RM2.60 (from RM2.75) after incorporating CDB's latest valuation. Maintain OUTPERFORM.

Exceeded expectations. 9MFY24 normalized net profit of RM598.6m (>2x YoY) trumped our expectations and consensus - coming in at 86% each of both full-year forecasts. The outperformance versus our forecast was largely attributed to: (i) Edotco: lower depreciation charges following the extension in useful life of its towers to 30 years (from 15 years) - which masked its weaker topline, and (ii) Robi: softer-than-expected earnings impact from flooding, political unrest and 11-day shutdown of mobile data in 3QFY24.

Earnings beat driven in part by accounting change. The conservative decision to revise the useful life of Edotco's towers was to align with the accounting practices of regional and global TowerCos. This adjustment resulted in an estimated PAT boost of RM40m, contributing in large part to the near 5-fold QoQ increase in Edotco's 3QFY24 normalized PATAMI.

Excluding the impact of this adjustment, AXIATA's adjusted 9MFY24 core net profit of RM558m would still surpass expectations, reaching 81% of full- year forecasts.

Majority of Opcos benefited from stronger topline and cost savings...

The surge in YTD earnings was mainly driven by:

(i) Edotco: Topline boost (from strong orders in Malaysia, Bangladesh and Cambodia), coupled with lower depreciation (as mentioned above) and effective cost management.

(ii) XL: Uplifted by higher data traffic, slightly enlarged subscriber base, and cost savings.

(iii) Smart: Supported by growth in blended mobile ARPU and sustained cost controls.

(iv) Robi: Propelled by growth in data usage and opex optimization drive.

...but some Opcos were burdened by corporate exercises. Conversely, OpCos that dragged on YTD bottomline include:

(i) Link Net: Widened YTD losses, due to: (i) roll-out of home passes incurred higher D&A and net finance costs, (ii) transfer of its ServeCo business to XL incurred one-off taxes in 3QFY24, (iii) lower enterprise revenue due to a deliberate reduction of a one-off project to manage margins, and (iv) lower residential ARPU.

(ii) Dialog: Impacted by higher D&A, integration of Airtel and deferred tax liabilities.

The key takeaways from AXIATA's analyst briefing are as follows:

1. Looking ahead, AXIATA intends to allocate the majority of proceeds from future asset monetization to reduce debt at HoldCo. This strategy would support the group's goal of implementing a progressive dividend policy moving forward.
2. The group's net debt-to-EBITDA ratio dipped significantly to 2.59x in 3QFY24 (4QFY23: 3.36x), marking its lowest level since the de-consolidation of Celcom back in 4QFY22. The improvement was primarily driven by a stronger MYR vs USD, as a substantial portion (38%) of the group's debt is USD-denominated. Additionally, the reduction in gearing was partially supported by a 14.6% YTD growth in EBITDA, despite MYR appreciating against BDT and IDR.
3. Based on its current YTD revenue growth of 3.3% (at constant FY23 average forex rates), AXIATA is confident in achieving its FY24 headline KPI of mid-single-digit revenue growth. Moreover, the group anticipates surpassing its FY24 KPI of mid-teens EBIT growth, given the current positive momentum (YTD: +38%)

Forecasts. Our FY24F-25F earnings are raised by 11%-10% as we account for lower D&A at Edotco and higher mobile data usage at Robi.

Valuations. We cut our Sum-of-Parts TP by 5% to RM2.60 (from RM2.75) after incorporating CDB's lower TP of RM3.82 (from RM5.59). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We continue to like AXIATA for: (i) its plans to deleverage and strengthen its balance sheet, (ii) exciting growth prospects for digital telcos and tower assets at emerging markets, and (iii) strong asset monetization prospects for its digital businesses and Edotco. Maintain OUTPERFORM.

Risks to our call include: (i) widened losses for Dialog following its acquisition of Bharti Airtel that was completed in 26 June, (ii) gestational earnings and cashflow drag from Link Net's aggressive fiber home pass expansion, and (iii) capex up-cycle from looming implementation of 5G in Indonesia.

Source: Kenanga Research - 29 Nov 2024