Telecommunications company Axiata Group released its financial results for the third quarter of financial year 2019 (3Q19) yesterday. MQ Research released a report yesterday, stating that EBITDA was 80% of its estimates, largely due to higher-than-expected depreciation and taxation.

Nonetheless, MQ Research maintains Outperform on Axiata. Bullish investors may consider call warrants AXIATA-C46 and AXIATA-C50 to gain a leveraged exposure…

Event

• MQ Research maintains its Outperform recommendation on Axiata following the release of 3Q19 results. 3Q19 core profit of RM120m brought YTD core profits to RM672m, representing 59% of MQ Research’s and consensus estimates. The miss was largely on the back of higher-than-expected depreciation (FRS16 adjustments) and taxation, with earnings before interest, tax, depreciation and amortisation (EBITDA) at 80% of MQ Research’s estimates.
• Operationally, all subsidiaries delivered revenue and profits (local currency) inline to better than MQ Research’s estimates. MQ Research believes the operational improvements should pave the way for a re-rating of Axiata’s shares which trade at 6.3x 20E enterprise value (EV) to EBITDA.

Impact

• Operationally healthy trends. All key subsidiaries were tracking at 75% or more of MQ Research’s FY19 core profit estimates in local currency terms. While Celcom posted a quarter on quarter (QoQ) decline in service revenues showing typical seasonality, MQ Research notes that vs 1Q19, financials continue to improve, suggesting that it is indeed rebasing. In addition to XL’s continued profitability in 3Q, Robi returned to profitability despite increased taxes in Bangladesh.
• Contesting taxes in Nepal. Axiata has commenced arbitration proceedings to challenge the (reduced) tax claim of RM780m by the Nepali tax authorities.
• 5G collaboration in Malaysia. Management explained that the proposed 5G collaboration between Celcom and Maxis was for urban areas in Malaysia, with coverage in other areas likely to see other options announced at a later date. Interestingly, DiGi, which has partnered Celcom in other arrangements was left out of the collaboration. Celcom is looking to its arrangement with Telekom Malaysia for fibre to fulfil the increased demand for fibre in a 5G era.
• Ahead on 2019 KPI for EBITDA and return on invested capital (ROIC); below on revenue. Management believes that it is on track to beat its EBITDA growth (5-8%, MQ 15%) and ROIC (5.2-5.6%) key performance indicators (KPI) but miss the revenue growth (3-4%, MQ 3.8%) and capex (
• MQ Research places its forecasts under review following these results.

Action and Recommendation

• Outperform maintained.

12-month Target Price Methodology

• AXIATA MK: RM5.47 based on a Sum of Parts methodology

Source: Macquarie Research - 29 Nov 2019