• Keep NEUTRAL, new MYR2.78 TP (SOP) from MYR3.25, 8% upside, c.4% yield. Axiata Group’s results fell short on elevated financing costs and depreciation expenses. Key standouts were the stabilisation of Link Net’s performance and XL Axiata’s (EXCL IJ, BUY, TP: IDR3,140) strong EBITDA uplift QoQ. The weak earnings prognosis is likely in the price, given the 19% share price decline over the last six months. Key risks are competition, weaker-than-expected earnings, and FX. Our TP incorporates a 2% ESG premium based on our internal methodology.

• Another miss. 2Q23 and 1H23 core earnings underwhelmed, making up just 14% of our and Street’s estimates. Relative to our forecasts, the key disappointments came from Link Net and edotCo. The group’s digital analytics arm ADA also posted an EBITDA loss for the quarter after having been profitable since FY19. The deconsolidation of Celcom’s earnings (now a 33.1% associate) had an overall dilutive impact as previously noted. A 5 sen interim DPS was declared, in line with expectations.

• Looking decent above the line. Topline ex device sales and EBITDA growth of 11.6% and 12.4% in 1H23 were decent, supported by growth across most operating companies (OpCos) except Ncell and ADA. The impact was, however, more than offset by the 50% jump in depreciation expenses and 34% increase in financing costs following the major debtdriven acquisition of Link Net and edotco’s Philippines foray in FY22.

• Some respite QoQ. Link Net’s numbers look to have stabilised somewhat with lower subs churn driving a 1% QoQ revenue uptick while EBIT expanded 54% QoQ. Dialog’s 1H23 EBIT fell 22% as direct and network costs remained elevated from inflationary pressures and the weak SLR. edotCo’s EBIT contracted 4% from higher financing costs and depreciation following the major acquisitions in FY22, with the positive impact only expected to be felt in 2H23. Boost’s EBIT losses widened QoQ due to the start-up costs of the digital bank (1H23: c.MYR20m).

• Outlook clouded by headwinds; balance sheet repair to continue. Management expects Dialog to return to ‘pre-crisis’ levels by end-2024 with recovery contingent on the pace of macroeconomic rebound. There are no immediate plans to exit Nepal with the carrying value of its investment reduced to MYR1.2bn post write-downs. On the progress of its strategic review, Axiata will provide a more comprehensive update at the 2023 Investor Day on 6 Dec. Post results call, we slash FY23-25F core earnings by 22-39%, mainly after lowering our estimates on Link Net and edotCo. The de-leveraging of its balance sheet remains a work in progress, as with the potential selldown of edotco and new investors emerging at Link Net, pursuant to its transformation into a NetCo.

Source: RHB Securities Research - 30 Aug 2023