• Maintain BUY, new SOP-based MYR4.08 TP from MYR4.76, 28% upside, 3.2% yield. 1Q22 results were broadly in line with operational improvements marred by seasonality and external headwinds. We lower FY22F-24F earnings by 5-14% mainly to factor in Dialog Axiata’s (Dialog) weakness and the SLR depreciation. Forward EV/EBITDA valuation at -2SD below the historical mean suggests downside risks are in the price. Our TP bakes in a 2% ESG premium based on our proprietary methodology.

• 1Q22 core earnings fell 10% QoQ (+65% YoY) on weaker EBITDA and revenue seasonality, partially buffered by lower tax expense. This formed 28% of our forecast (consensus: 30%) on expectations of rising opex in subsequent quarters. Core EBITDA rose 7.7% YoY on 7% revenue growth with operational improvements across all operating entities, with the exception of Ncell Axiata (Ncell). The notable positives: i) edotco’s revenue and EBITDA (up 19% and 30% YoY) from the acquisition of Touch Mindscape (4Q21) and higher co-locations and ii) Celcom’s 3.8x YoY surge in core earnings from the low base of accelerated depreciation in FY21. The key drags: i) Ncell’s double-digit EBITDA decline YoY (-12%) on lower voice and international long distance or ILD revenue (-16.2% YoY) and ii) Dialog’s headline losses from the steep depreciation of the SLR on USD debt.

• Celcom’s service revenue down 3.5% QoQ. After growing for four consecutive quarters, service revenue dipped 3.5% QoQ (+3.3% YoY) while EBITDA narrowed 7%. This lagged the -1% to +0.3% QoQ mobile revenue booked by its listed peers, as prepaid subs base contracted while prepaid ARPU fell under MYR30.00. Core earnings slipped 26% QoQ on Cukai Makmur. 1Q22 core revenue ex-device grew 5.2% YoY on stronger prepaid topline and enterprise contributions from newly acquired subsidiaries.

• More pain in Sri Lanka. With inflation projected to top 40% in May/June (April: 33.8%), Dialog’s losses should widen in 2Q22. The silver lining here is its strong balance sheet (net debt/EBITDA: 0.5x) coupled with a shareholder loan from Axiata amounting to USD72m, which would allow it to meet its USD loan repayments (1Q22: USD145m debt). Dialog is seeking government approval for price hikes.

• Forecast. We cut FY22F-24F core earnings by 5-14%, mainly to factor in Dialog’s weakness and SLR/MYR depreciation (YTD: -43%). With share price having corrected 23% YTD, we think the market may have priced-in the downside risks from the economic crisis engulfing Sri Lanka and domestic 5G and merger uncertainties. Our TP is cut to MYR4.08 post the earnings revision with a 20% country risk premium imputed for Sri Lanka. If Dialog’s valuation is removed from our SOP, TP drops to MYR3.65. Key risks to our call and the stock are competition, extended economic woes in Sri Lanka, and regulatory risks.

Source: RHB Research - 26 May 2022