KEY INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings surged by +46.7%yoy to RM374.0m due to lower finance cost and effective tax rate
• 9MFY20 normalised earnings contracted at a slower-thanexpected pace of -21.5% to RM544.0m
• More profound impact to Covid-19 due to the group’s regional presence
• While profitability has improved, profit margin still fell below its listed peers
• Maintain NEUTRAL with a revised TP of RM3.88

Recovery in the third quarter. Axiata’s 3QFY20 EBITDA came in at RM2,885.0m, an increase of +3.0%yoy. The improvement in EBITDA contribution was primarily stemmed from across all the opcos with the exception of Ncell and Edotco. Cumulatively, 9MFY20 normalised EBITDA amounted to RM7,942.0m, a marginal increase of +0.6%yoy (refer to Table 1).

Surge in earnings. Meanwhile, 3QFY20 normalised earnings surged by +46.7%yoy to RM374.0m. This was mainly led by the improvement in EBITDA, lower finance cost and lower effective tax rate. Cumulatively, 9MFY20 normalised still fell by -21.5%yoy to RM544.0m largely due to higher depreciation, impairment and amortization charges. Nonetheless, 9MFY20 financial performance still came in better than ours and consensus expectations, accounting for 92.8% and 85.0% of full year FY20 earnings estimates respectively. That being said, we expect 4QFY20 to trend lower as compared to 3QFY20 due to challenging operating environment at some of its opcos.

Impact. We are revising FY20-22 EBITDA assumption slightly lower to between RM9,1015.8m and RM10,098.2m as we input lower EBITDA contribution primarily from Ncell. However, we are revising our FY20-22 earnings estimates upwards to between RM779.2m and RM962.3m as we lower our finance cost and effective tax rate assumptions to better reflect the results thus far.

Target price. We are revising our target price to RM3.88 (previously RM3.10). This is based on pegging FY21 EBITDA to revised EV/EBITDA multiple of 5.6x (previously 4.7x). The higher multiple is one standard deviation below the group two year historical average of 6.1x. We view that the higher multiple reflects the improvement in the operational efficiency and cost control initiatives.

Maintain NEUTRAL. The group’s EBITDA has been increasing steadily, though there is a mix of performance across all its operating companies. This can be seen in the group’s 9MFY20 performance where generally all the opcos show improvement in EBITDA with the exception of Celcom, Ncell as well as the digital businesses.

While the group’s profitability continue to show progress, the profit margin still fall below its listed peers. On another note, we view that the group’s exposure to the Covid-19 pandemic is more profound due to its regional presence. All factors considered, we are maintaining our recommendation to NEUTRAL on Axiata.

Source: MIDF Research - 30 Nov 2020