INVESTMENT HIGHLIGHTS

• 9MFY18 normalised EBITDA grew marginally by +1.6%yoy to RM7,017m, in-line with ours and consensus estimates

• Higher contribution from Dialog and Robi was partially offset by underperformance from Celcom and Smart

• Maintaining capex intensity at 24%, with focus on digital and network investments

• Maintain NEUTRAL with a revised target price of RM3.56 with a lower EV/EBITDA multiple target of 5.6x

In-line with expectation. Axiata Group Bhd’s (Axiata) 3QFY18 normalised EBITDA amounted to RM2,208m, a decrease of -8.2%yoy. This led to minimal year-over-year growth (+1.6%yoy) in 9MFY18 normalised EBITDA to RM7,017m. This was mainly attributable to higher contribution from Dialog and Robi which was partially restrained by lower contribution from Celcom and Smart (refer to table 1). All in, the 9MFY18 normalised EBITDA performance came in within ours and consensus expectations, accounting for 80.0% and 79.0% of full year FY18 EBITDA estimates respectively.

9MFY18 normalised earnings performance deteriorate further. Meanwile, Axiata’s 9MFY18 normalised earnings equal to RM967m, a reduction of -24.9%yoy. This was negatively impacted by higher depreciation (-RM453m), interest rate hike (-RM91m) and digital investments (-RM131m).

Steady capital spending. Axiata’s 9MFY18 capital expenditure (capex) decreased slightly by -1.6%yoy to RM4,249m, in-tandem with lower 9MFY18 revenue (-2.9%yoy). Focus of spending was primarily on both digital and network investments. This resulted in stable capex-torevenue ratio (capex intensity) of 24%, in comparison with the previous corresponding period. Notable reduction in capex was seen stemming from Ncell (-75.4%yoy).

Impact on earnings estimates. We are maintaining our FY18 and FY19 EBITDA assumptions at this juncture. However, we are adjusting the minority interest portion to better reflect the results thus far. All in, our FY18 and FY19 earnings estimates has been revised to RM1,194.8m and RM1,123.1m respectively.

Target price. We are deriving a revised target price of RM3.56 (previously RM4.86). This is premised on pegging revised FY19 EBITDA to updated EV/EBITDA multiple of 5.6x (previously 6.9x), which is one standard deviation below the group’s 2-year historical average of 6.8x. We opine that the lower EV/EBITDA multiple reflects the on-going challenging external environment and market specific issues.

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 as well as exposure to unfavourable impact on forex translation for each of the country the group operates in. Nonetheless, our primary concern lies with the performance of Celcom, XL Axiata and Ncell which formed the bulk 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 - 26 Nov 2018