In a report released last night, Macquarie Equities Research (MQ Research) maintains an Outperform rating on Axiata as the company’s 2Q19 improved result tracks in-line with the analysts’ estimates. With the improved profitability at Celcom, MQ Research believes that Celcom along with XL will be the key driver of Axiata’s FY18-21E earnings.

Event

• MQ Research maintains its Outperform recommendation on the shares of Axiata following the release of the company’s 2Q19 results. 2Q19 core profit of RM252m (+3% QoQ) brought 1H19 core profit to RM497m, representing 43% of MQ Research and 44% of the consensus estimates. With further improvements expected at its various subsidiaries, MQ Research would describe these results as tracking in line.
• The most important element of this result, in MQ Research’s view, was the improved profitability at Celcom, which MQ Research believes, together with XL, will be the key driver of a 41% FY18–21E core earnings compound annual growth rate (CAGR). Merger talks with Telenor are ongoing, and management remains hopeful of signing a formal agreement by November (six months).

Impact

• Celcom trends positive. Celcom posted a better-than-expected 4% QoQ uplift in service revenue, as an uplift in prepaid average revenue per unit (ARPU) outweighed subscriber declines. MQ Research believes this could be due to the festive season. Nonetheless, good cost control, the revenue uplift and an RM50m write back led to a 24% QoQ uplift in Celcom’s earnings before interest, tax, depreciation and amortisation (EBITDA) – tracking in line with MQ Research’s estimate.

• Merger on track. Management believes that it is about 70% done on the due diligence part of the merger process and about 80% done in ironing out terms of the merger with Telenor. Where more work needs to be done is around the terms relating to national interests, etc. Management believes that it should be able to complete the signing of a definitive agreement by end-November, ie, within the three- to six-month target set at the end of May, when the deal was first announced.

Action and Recommendation

• Outperform maintained.

12-month Target Price Methodology

• AXIATA MK: RM5.00 based on a Sum of Parts methodology

Source: Macquarie Research - 30 Aug 2019