• Stay BUY with new SOP-derived TP of MYR3.73 from MYR4.08, 23% upside, 3.8% yield. Axiata’s 1H22 results were a beat, with stands outs being Celcom and edotco with double digit earnings growth. The concerns over the macroeconomic challenges plaguing its frontier markets look to be priced-in with share price up c.16% from July lows. Key risks are competition, weaker than expected earnings, and regulatory upheavals. Upside catalysts are the successful completion of the domestic mobile merger and positive earnings surprises.

• 2Q22 core earnings (ex FX losses) down for the second quarter in a row as steady EBITDA was offset by higher financing cost and tax expense (Cukai Makmur). This brought 1HFY22 core earnings to MYR702m (+35% YoY), at 64% of our forecast (consensus: 58%). Relative to our numbers, the deviations were largely on account of a stronger than expected Celcom and lower than expected depreciation charges. 1H22 headline LAT of MYR149m mainly reflects unrealised FX losses (stronger USD) on USD debt at the holdco level and Dialog (Sri Lanka). Axiata has deferred the interim DPS payout due to the macroeconomic conditions at its frontier markets, and would look to revisit this in the following quarter.

• Dialog and Ncell mask an otherwise decent showing. 2Q22 consolidated EBITDA grew 4% QoQ (+7.1% YoY), off a seasonally weaker 1Q22 with 1H22 EBITDA up 7.4% (+8.4% on constant currnecy basis and ahead of KPI guidance). The stand-outs were Celcom and edotco which enjoyed strong double-digit YTD EBITDA growth (see Figure 2). Dialog’s EBIT dived 25.3% due to acute inflationary pressure and the Sri Lankan Rupee (SLR) depreciation (c.40% of opex is USD denominated) while Ncell saw an 18.8% decline (lower international long distance revenue and domestic interconnect revenue). Following regulatory approval obtained for tariff hikes (+ 20% for mobile services/+25% for pay-TV services), Dialog is awaiting the presidential consent which it expects soon. The price hikes should help relieve the pressure on EBITDA from the economic crisis on top of a cost mitigation plan in place.

• No need for an equity injection. Axiata sees little need for a cash/equity call despite the higher debt incurred on Linknet (LINK IJ, NR)’s acquisition and the purchase of PLDT towers by edotCo, which have pushed annualised gross debt/EBITDA to 2.9x. We see gearing levels normalising with the repayment of the MYR2.4bn shareholder loan from Celcom post merger with Digi (DIGI MK, NEUTRAL, TP: MYR3.65) within six months, c.MYR1.9bn proceeds from Telenor and Digi (part of the merger transaction) and the entry of a strategic investor at edotco or group level. On the equity stake and commercial wholesale agreement with Digital Nasional Berhad (DNB), management said discussions are progressing well. The mandatory takeover offer (MTO) for Linknet is slated for completion in October. There is a 2% ESG premium ascribed on the overall valuation, premised on the group’s proactive ESG efforts, especially on decarbonisation initiatives.

Source: RHB Research - 29 Aug 2022