Review

• Axiata reported a widened net loss of RM1,299mn (>6x YoY) in 9MFY23. Results were dragged by exceptional items including: i) Ncell asset impairment (RM1.2bn), ii) Ncell write-off of capital gains tax-related receivable assets (RM317mn), iii) CelcomDigi’s accelerated depreciation from the revision in assets useful life and sites rationalisation, and iv) net gain on the disposal of Celcom (RM402mn), among others.

• Excluding the exceptional items, Axiata’s 9MFY23 core net profit of RM426mn (-60.5% YoY) came within ours but above consensus full-year estimates at 72.0% and 86.0%, respectively.

• On a constant currency basis, 9MFY23’s revenue and EBIT grew 13.1% YoY and 8.9% YoY. Revenue growth was anchored by most opcos, including: i) XL (driven by better pricing environment), ii) Robi (on subscriber and ARPU growth), iii) Dialog (on higher international traffic hubbing and data revenue), iv) edotco (higher built-to-suit & colocation and inorganic contribution from Philippines), v) Boost (lifted by merchant discount rate charge and higher loan disbursement), and vi) the acquisition of Link Net. Growth from these opcos more than offset weaker revenue from: i) Ncell (lower voice revenue), ii) ADA (lower customer marketing spend), and iii) Smart (due to one-off scratch card revenue in FY22). Of note, reported revenue grew at a softer pace of 9.4% YoY due to the significant depreciation of the Bangladesh Taka and Sri Lanka Rupee.

• At the bottom line, 9MFY23’s core net profit sank 60.5% YoY to RM426mn. Earnings were dragged by higher depreciation and amortisation (from XL, Link Net, and edotco), higher finance cost, and lower share of results from CelcomDigi (versus PATAMI contribution from Celcom as a subsidiary in 9MFY22).

Impact

• We maintain our earnings estimates.

Outlook

• KPIs maintained. Management had reiterated Axiata’s FY23 headline KPIs: i) revenue ex-device growth of mid-single digit % (FY22: +10.3% YoY), and ii) EBIT growth of high-single-digit % (FY22: +20.1% YoY). Meanwhile, CAPEX remained guided to be beneath RM7.1bn to manage the group’s leverage. At the end of 3QFY23, Axiata’s net debt/EBITDA stood at 3.17x, versus 3.06x at the end of 2QFY23. This followed the reclassification of Ncell as held for sale.

• Looking to Exit Nepal. In view of Nepal’s increasingly challenging outlook, Axiata’s Board of Directors has decided to exit the country. Correspondingly, Axiata has reclassified 80%-owned Ncell as held for sale and recognised asset impairment amounting to RM1,865mn. To recap, over the years, Ncell has been challenged by declining revenue market share, declining ARPU from shrinking international long distance and voice revenue, as well as several regulatory challenges. Post impairment, Ncell’s book value was guided at RM378mn. Management shared that the group has been in talks with potential buyers.

• edotco Focused on De-leveraging & Growth. With regards to news on edotco’s stake sale, management highlighted that due diligence is ongoing, and the focus will be on raising funds to de-leverage and support growth in emerging markets, including the Philippines and Indonesia. Axiata is edotco’s largest shareholder, with a 63% stake.

• 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), and Sri Lanka (Dialog).

Valuation & Recommendation

• We have lowered our TP for Axiata to RM2.35 (previously RM2.80) based on SOTP valuation after i) revising the valuation methodology for Ncell based on its book value and ii) attaching a higher conglomerate discount of 30% (previously 20%) to reflect the persistent risks associated with Axiata’s investments in its frontier markets. Our TP implies an EV/EBITDA of 6.3x against CY24F EBITDA. Given the stock’s unfavourable risk-reward potential, we downgrade our recommendation on Axiata to Sell.

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

Source: TA Research - 30 Nov 2023