KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised EBITDA grew by +19.1%yoy, supported by all the opcos with the exception of Ncell

• Ncell performance was impacted by the delay in spectrum assignment and price competition from fixed ISPs

• However, 1QFY20 earnings was primarily impacted by higher depreciation and amortization charges

• 1QFY20 capex came in -11.7%yoy lower, leading to lower capex intensity ratio of 21.1%

• Maintain BUY with an unchanged TP of RM4.67

Double digit growth in normalised EBITDA. Axiata’s 1QFY20 normalised EBITDA came in at RM 2,584m, an increase of +19.1%yoy. Note that the exceptional items mainly relate to one-off employee restructuring program at Celcom amounting to RM101m. Higher EBITDA contribution was seen across all the operating companies which the exception of Ncell (refer to Table 1). All in, this came in within ours and consensus expectations, accounting for 26.6% and 24.3% of full year FY20 EBITDA estimates respectively.

Lower earnings. Meanwhile, 1QFY20 normalised earnings amounted to RM121m, a decline of -42.1%yoy. The reduction in earnings mainly stemmed from higher depreciation and amortization charges, higher net finance cost and higher taxation.

Careful capital spending. 1QFY20 capital expenditure (capex) came in lower at RM1,274m (-11.7%yoy). This was mainly due to lower capital spending from all the operating companies with the exception of XL (+5.1%yoy) and Robi (+168.3%yoy). As a result, the capex intensity ratio fall to 21.1% as compared to 24.2% recorded in 1QFY19.

Impact. We are maintaining our EBITDA estimates at this juncture. However, we are inputting higher depreciation and amortization and higher effective tax rate. This lead to revision in FY20/21/22 earnings to RM586.4m/RM650.9m/RM739.0m respectively.

Target price. We are maintaining our target price of RM4.67. This is premised on pegging FY20 EBITDA to target EV/EBITDA multiple of 6.3x which is the group’s two year historical average.

Maintain BUY. Despite the on-going regulatory issues and execution risk, the group has performed well across almost all the group’s opcos. This has enabled the group to withstand the underperformance stemming from Ncell. Nevertheless, we expect the spectrum issue surrounding Ncell to be resolved by 2HCY20 which will put Ncell back on the profit growth path. Meanwhile, we expect the group is on track to meet its 5-year cost savings target of RM5.0b by 2021.

In addition, we believe that Axiata’s valuation is currently attractive. At this juncture, Axiata’s EV/EBITDA stands at below 6x while its listed peers have EV-EBITDA of more than 10x. This is despite Axiata has superior EBITDA performance. All factors considered, we are maintaining our BUY recommendation on the stock.

Source: MIDF Research - 22 May 2020