INVESTMENT HIGHLIGHTS

• Poor performance from Idea, Smart and Edotco impacted Axiata’s 1QFY18 normalised earnings
• Nonetheless, 1QFY18 EBITDA remained above RM2b, supported by better performance from Dialog and Robi
• Higher capital spending for XL and Robi lifted 1QFY18 capex
• Maintain NEUTRAL with a revised target price of RM5.49

1QFY18 normalised earnings trended lower. Axiata Group Bhd (Axiata) 1QFY8 normalised earnings amounted to RM200m, a decrease of -31.3%yoy. The bulk of the exceptional items mainly came from loss on dilution of Idea (-RM358m). The decline in 1QFY18 normalise earnings was mainly attributable to higher losses from Idea, start up investments in new businesses and lower contribution from Smart and Edotco.

1QFY18 EBITDA within expectation. Axiata’s 1QFY18 EBITDA reduced by -5.5%yoy to RM2,036m. The reduction was largely due to lower contribution from Celcom, XL Axiata, Smart and Ncell (refer to Table 1). Nonetheless, this accounts for 21.8% and 21.0% of ours and consensus of full year FY18 EBITDA estimates respectively.

Higher capital spending. Axiata’s 1QFY18 capital expenditure (capex) increased by +23.6%yoy to RM1,328m. This led to higher capex-to-revenue ratio (capex intensity) of 23% as oppose to 18% achieved in 1QFY17. Higher capex was mainly spent on XL (+69.6%yoy) and Robi (+35.8%yoy).

Impact. We made no changes to FY18 and FY19 EBITDA estimates. However, we are reducing FY18 and FY19 earnings estimates by -6.1% and -6.3% respectively as we input high loss of from associates and lower contributions from Smart.

Target price. We are rolling forward our valuation base year to FY19 and derive a new target price of RM5.49 (previously RM5.31). This is premised on pegging FY19 EBITDA to 7.5x EV/EBITDA, which is the group’s 5-year historical average. To recall, we view that our valuation methodology would better reflect the group’s effort to continuously repeat the industry s-curves cycle via active M&A activities.

Source: MIDF Research - 23 May 2018