Review

• Axiata’s 1HFY23 core net profit of RM291mn (-58.6% YoY) came below ours and consensus full-year estimates at 36.5% and 31.8%, respectively. Core earnings, among others, exclude the impact of net gain on the disposal of Celcom (RM402mn), Ncell asset impairment (RM394mn), Ncell write-off of capital gains tax-related receivable assets (RM317mn), and CelcomDigi’s accelerated depreciation from the revision in assets useful life and sites rationalisation. On our end, the miss was mainly due to higher-than-expected finance costs in 2QFY23 amid the higher interest rate environment and stronger USD.

• Axiata declared a 1st interim dividend of 5.0sen.

• On a constant currency basis, 1HFY23’s revenue ex-device and EBIT grew 17.8% YoY and 5.7% YoY. Revenue growth was driven by almost all opcos including: i) XL (driven by data and Lebaran), ii) Robi (lifted by voice, data, and value-added services), iii) Dialog (higher data revenue and international traffic hubbing), iv) Smart (higher prepaid, international business, and inbound roaming), v) Boost (spurred by merchant discount rate charge and higher loan disbursement), vi) edotco (higher built-to-suit & colocation and inorganic contribution from Philippines), and vii) the acquisition of Link Net. Growth from these opcos was partly offset by lower revenue from i) ADA (lower customer marketing spend) and ii) Ncell (lower voice revenue). Note that reported revenue only grew at a milder pace of 11.7% YoY due to the significant depreciation of the Sri Lankan Rupee and Bangladesh Taka.

• At the bottom line, 1HFY23’s core net profit sank 58.6% YoY to RM291mn. Earnings were dragged by higher depreciation and amortisation (from XL, Link Net, and edotco), finance cost (from XL, Robi, Dialog and edotco), and lower share of results from CelcomDigi (versus PATAMI contribution from Celcom as a subsidiary in 1HFY22).

Impact

• We cut our FY23F/FY24F earnings estimates by -25.7%/-17.0% as we raised our finance cost assumptions to reflect actual 2QFY23 results.

Outlook

• Management has maintained Axiata’s FY23 headline KPIs: i) revenue exdevice growth of mid-single digit % (FY22: +10.3% YoY), and ii) EBIT growth of high-single digit % (FY22: +20.1% YoY), based on continuing operations. Meanwhile, CAPEX was guided at RM6.5bn to RM6.8bn (FY22: RM6.6bn) beneath earlier RM7.1bn to manage the group’s leverage. Axiata’s net debt/EBITDA as at 2QFY23 stood at 3.06x (1QFY23: 3.23x).

• While Axiata’s regional presence offers growth opportunities, we remain cautious of the challenges posed by heightened macroeconomic headwinds (e.g., stronger USD and higher interest rates), especially across its frontier markets including Bangladesh (Robi), Sri Lanka (Dialog), and Nepal (Ncell).

Valuation & Recommendation

• In all, we maintain our recommendation on Axiata with a TP of RM2.80 based on SOTP valuation, which implies an EV/EBITDA of 6.6x against CY24F EBITDA. However, given the stock’s improved upside potential, we upgrade the stock from Hold to Buy.

• Key downside risks include heightened competition, macroeconomic headwinds, and regulatory uncertainties.

Source: TA Research - 30 Aug 2023