Macquarie Equities Research (MQ Research) published a report on Axiata ahead of the upcoming 4Q19 results to be announced on Friday (21 Feb). While MQ Research reduced Axiata’s 12-month target (TP) by 2.4% to RM5.34 from RM5.47 and lowered its FY19/20/21E core profit estimates by 19.2/8.6/10.1%, MQ Research maintains an Outperform rating on this telco company.

Event

• MQ Research maintains its Outperform recommendation on Axiata ahead of 4Q19 results due on 21 Feb 2020. MQ Research expects operational improvements seen in 3Q19 to continue across its core subsidiaries. However, tax rates are likely to remain elevated for the foreseeable future, resulting in a downgrade in MQ Research’s estimates and a reduced-price target of RM5.34 (prev RM5.47). MQ Research believes concrete evidence of Axiata’s improved performance will provide the key rerating catalysts for its shares which trade at an undemanding 5.7x 20E adjusted enterprise value/earnings before interest tax, depreciation and amortisation (EV/EBITDA).

Impact

• Celcom to remain key focus. MQ Research expects Celcom to deliver further improvements in service revenue as market conditions remained stable in 4Q19, and typical seasonal factors play out. Increased handset sales should also support steady margins. MQ Research does however expect 2020 service revenues to decline (MQ estimates -2%) as a result of the COVID-19 virus impact on both inbound and outbound roaming. Further cost cutting efforts, however, should support EBITDA and profit growth at Celcom, in MQ Research’s view, where it expects margins to expand circa 2% to 39% in 20E.

• Tax rates to remain elevated. Axiata’s effective tax rates are set to remain above 30% for the foreseeable future. In addition to certain non-allowable deductions, the introduction of a higher tax on revenues at Robi effective 2Q19 are being recorded at the tax level rather than deducted from gross sales.

Earnings and Target Price Revision

• MQ Research reduces its FY19/20/21E core profit estimates by 19.2/8.6/10.1% on largely higher tax rate assumptions. MQ Research has also adjusted its estimates to factor in FRS16 for XL Axiata which are being recorded at the group level. MQ Research Sum of Parts (SoP)-derived price target is reduced form RM5.47 to RM5.34 on these adjustments.

Price Catalyst

• 12-month TP: RM5.34 based on a SOP methodology.
• Catalyst: Delivery of improved operational results from core operations.

Action and recommendation

• Outperform maintained.

12-month Target Price Methodology

• AXIATA MK: RM5.34 based on a SOP methodology

Source: Macquarie Research - 20 Feb 2020