KEY INVESTMENT HIGHLIGHTS

• 1HFY20 normalised EBITDA remained resilient at RM5,156.0m (+1.3%yoy)

• However, 1HFY20 normalised earnings dwindled by -62.1%yoy to RM166.0m, in-line with our expectation

• Majority of the operating companies recorded weaker earnings with the exception of Robi, Smart and Edotco

• Weaker earnings generative capability to limit dividend payout

• Downgrade to NEUTRAL with a revised TP of RM3.10

Resilient EBITDA. Axiata’s 2QFY20 normalised EBITDA came in at RM2,572.0m, a contraction of -3.7%yoy. Lower EBITDA contribution mainly stemmed from Celcom, Ncell and Dialog. Cumulatively, 1HFY20 normalised EBITDA amounted to RM5,156.0m, a marginal increase of +1.3%yoy (refer to Table 1). This came in within our expectation, accounting for 53.2% of full year FY20 EBITDA forecasts.

Weak earnings. Meanwhile, 2QFY20 normalised earnings decline by -80.8%yoy to RM44.0m. This was largely due to the -5.9%yoy reduction in revenue to RM5,792.4m and higher depreciation and amortization charges of RM1,842.2m (+7.9%yoy). This led to lower 1HFY20 normalised earnings of RM166.0m which came in at the lower end of our FY20 earnings estimates.

Impact. We are maintaining our earnings estimates at this juncture.

Target price. We are reducing our target price of RM3.10 (previously RM4.67). This is premised on pegging FY20 EBITDA to revised target EV/EBITDA multiple of 4.7x (previously 6.3x). The lower multiple is one standard deviation below the group two year historical average of 6.2x. The discount to valuation was mainly premised on the group’s poor earnings quality which is seen almost across all the group’s major operating companies.

Downgrade to NEUTRAL. The group’s EBITDA has been increasing steadily, though there is a mix of performance across all its operating companies. However, our concern lies within the group’s ability to generate profit. Moreover, we view that the advent Covid-19 pandemic has created more challenges for the group to improve its bottomline. This could also potentially hamper the group’s cost savings target of RM5.0b by 2021. Geographically, only a few of its operating companies has underperformed in terms of earnings. This would also potentially limit the dividend payout. All factors considered, we are downgrading our recommendation to NEUTRAL from Buy previously

Source: MIDF Research - 28 Aug 2020