INVESTMENT HIGHLIGHTS

• 1HFY18 EBITDA of RM4.1b (-7.9%yoy) came in lower than ours and consensus expectations

• Leading to lower 1HFY18 normalised earnings of RM591m, a decrease of -24.1%yoy

• Underperformance from the group’s main operating companies i.e. Celcom, XL Axiata, Smart and Ncell

• Maintain NEUTRAL with a revised target price of RM4.86

1HFY18 EBITDA failed to keep pace with our expectation. Axiata’s 1HFY18 EBITDA reduced by -7.9%yoy to RM4,080m. The reduction was mainly attributable to lower contribution from Celcom, XL Axiata, Smart and Ncell (refer to Table 1). This came in below ours and consensus’ expectations, accounting for 43.6% and 44.1% of full year FY18 EBITDA estimates respectively.

In-tandem, 1HFY18 normalised earnings trended lower. Axiata Group Bhd (Axiata) reported 1HFY18 loss of RM3,505m. After adjusting for exceptional items, the bulk of which came from one-off provision of loss on its investment in India of RM3,379.9m, 1HFY18 normalised earnings amounted to RM591m (-24.1%yoy). This was impacted by digital investments (-RM135m), higher depreciation and amortisation expenses (-RM29m) and tax credit in previous years (-RM54m).

Higher capital spending. Axiata’s 1HFY18 capital expenditure (capex) increased by +10.2%yoy to RM3,193m to advocate its data leadership strategy. This led to higher capex-to-revenue ratio (capex intensity) of 27% as oppose to 24% attained in 1HFY17. Higher capex was mainly spent on Celcom (+31.6%yoy), XL (+13.1%yoy) and Robi (+11.6%yoy).

Dividend. Axiata’s 1HFY18 dividend declared amounted to 5 sen. This constitutes 55.5% of our full year FY18 dividend estimates of 9 sen.

Impact on earnings estimates. We are reducing the EBITDA contribution primarily from Celcom and XL to better reflect the results thus far. As a result, FY18 and FY19 EBITDA estimates were reduced by -6.3% and -3.9% respectively. Consequently, FY18 and FY19 earnings estimates were revised downwards by -8.1% and -6.8% respectively.

Target price. Subsequent to our downward adjustment in EBITDA, we are deriving a revised target price of RM4.86 (previously RM5.49). This is premised on pegging revised FY19 EBITDA to updated EV/EBITDA multiple of 6.9x (previously 7.5x), which is the group’s 2-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.

Maintain NEUTRAL. We view that Axiata’s strategy of having regional presence bear mixed results for the group. It exposes the group to various regulatory issues and execution risks for each of the country the group operates in. At this juncture, our primary concern lies with the performance of Celcom and XL Axiata which contributes slightly more than half of the group’s EBITDA. In addition, given its upbeat capex investment, we view that dividend yield is less attractive as compared to its listed peers. All factors considered, we are reiterating our NEUTRAL recommendation on the stock.

Source: MIDF Research - 27 Aug 2018