Axiata’s upcoming 4Q13 results, due on 20 Feb, are likely to be softer yo-y  (due to  XL’s weak  performance) and q-o-q (XL booked a MYR113m one-off  gain in 3Q13). Dialog’s unexciting 4Q13 results and the MYR’s continued appreciation vs  IDR suggest  that  positive earnings surprises are unlikely.  However, we believe these  negatives are largely priced in. We think special dividends are unlikely for now. Maintain NEUTRAL.

• Expect a soft  4Q13.  Overall, we expect Axiata’s  4Q13 earnings to  dip by  low  single  digits  y-o-y due to  weak  earnings  (-45.7% y-o-y)  from  XL Axiata  (EXCL  IJ,  NEUTRAL,  FV:  IDR4,400).  Q-o-q,  we  expect  the company’s  4Q13 earnings to decline  by  the double digit range  following XL’s  MYR113m  lumpy forex hedging gain  booked in 3Q13.  We do not expect  any  positive  earnings  surprises  to  consensus  estimates,  given that Dialog Axiata (DIAL SL, NR)’s  FY13 earnings  comprised only 85% of our full-year forecast.  Also, the appreciation of the MYR  against the IDR (+14.2% y-o-y), could squeeze group earnings.  
• 4Q13 EBITDA margin to dip y-o-y. We forecast Axiata’s 4Q13 EBITDA margin to hover at 39-40% (3Q13: 40.4%, 4Q12: 40.3%) as XL’s (4Q13: 41.1%, 4Q12: 43.6%) is expected to remain subdued due to slower-thanexpected  revenue  growth  recovery  and  declining  short  messaging service  (SMS)  revenue  owing  to  rising  over-the-top  usage.  Elsewhere, Dialog  Axiata’s  EBITDA  margin  was  also  squeezed  (4Q13:  28.5%, 4Q12: 29.9%) by higher network opex.
• Dividends.  Having  declared  an  interim  single-tier  DPS  of  8  sen,  we expect Axiata to declare a final DPS of 14  sen,  based on our FY13  DPS forecast  of  22  sen,  and  assuming  a  75%  payout  ratio  (FY12:  70%).Special dividends are unlikely as  the company  is extending a USD500m shareholder loan to XL to  part-finance the  USD865m acquisition  of Axis. At the holding company level, Axiata would  be left with  a relatively thin buffer of about MYR1.5bn after disbursing the loan to XL
• Investment case.  We remain  NEUTRAL on Axiata, with an  unchanged SOP-based FV of MYR6.50.  Its FY14 earnings growth outlook remains cloudy due to: i) XL’s slow recovery, and ii)  the  latter’s  earnings dilution following  its  acquisition  of  Axis.  While  proper  execution  will  lift  XL’s competitiveness  and  give  rise  to  long-term  capex  savings,  we  believe these short-term concerns will likely weigh on Axiata’s share price.

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Company Profile

Axiata is one of the largest Asian telecommunication companies,  with controlling interests in mobile operators in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia.

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Source: RHB