• Keep BUY and MYR3.40 TP (SOP), 24% upside, c.4% yield. Axiata Group’s 1Q24 results met our expectations and were a consensus beat with double- digit YoY expansion in EBITDA and core earnings. The tapering of interest rates and the USD should alleviate debt pressure on its books. We still like the stock for its earnings recovery and balance sheet deleveraging thesis.

• 1Q24 core PATAMI more than doubled YoY to MYR190m (-34% QoQ) on double-digit revenue and EBITDA growth, with EBITDA margin at a new high. This formed 25% of our forecast and was a consensus beat (28%). Growth was across most mobile assets with the standouts being XL Axiata (XL; EXCL IJ, BUY, TP: IDR3170), Robi, Smart, and edotCo.

• Key highlights:

  i. XL continues to benefit from market re-pricing with revenue and EBIT up 12% and 65% YoY as ARPU and EBITDA margin hit record highs;
  
  ii. Edotco’s higher co-locations and new towers contributed to 7% and 14% revenue and EBIT uplifts. High financing cost remains a key drag with net debt of MYR5.9bn in 1Q24. The divestment of edotCo Myanmar (EMM) is pending regulatory approvals and expected to conclude by the year-end with proceeds (USD150m) utilised to pare debt;
  
  iii. Boost’s (digital financial services arm) losses widened due to start-up costs for the digital bank;
  
  iv. Group net debt has risen slightly due to the USD appreciation with net debt/EBITDA at 3.01x (4Q23: 3.4x) from higher EBITDA. The target is to lower net debt/EBITDA to 2.5x by FY26F.

• Recent corporate developments. A non-binding MoU was inked with Indonesia’s Sinar Mas Group on 15 May to explore the potential merger of its 66.3%-owned XL with Smartfren, the country’s smallest mobile operator. While the strategic intent of the deal is acknowledged, a clear articulation of the transaction rationalise is required, given Smartfren’s weaker franchise and losses. The transfer of Link Net’s residential fibre customers to XL (RetailCo), with the former transforming into an InfraCo is pending shareholder approval at end-June.

• Valuations and forecasts. Our forecasts and SOP TP are maintained pending today’s results call. Management has reaffirmed its guidance of mid-single digit revenue growth and mid-teens EBIT growth on constant currency basis. Our TP has a 2% ESG premium factored in. Key risks: Competition, weaker- than-expected earnings, regulatory setbacks, and FX volatility. Axiata has determined its Scope 3 emissions with near-term targets pending validation.

Source: RHB Research - 30 May 2024