• Keep BUY, with new SOP-based TP of MYR4.22 from MYR3.73, 39% upside and c.5% FY23F yield. 9M22 results were a beat, supported by inorganic acquisitions. Looking forward, we see synergies from the domestic mobile merger as a key re-rating catalyst. Valuation remains undemanding following the sharp 27% sell-down YTD with forward EV/EBITDA at <5x. Our TP factors in a 2% ESG premium. Key risks: Competition, lower-than-expected merger synergies, and regulatory setbacks.

• Core 9M22 earnings formed 88% of our forecast (consensus: 86%). Relative to our forecast, the deviation was largely on account of a stronger edotco and lumpy acquisitions. YTD numbers are on track to comfortably surpass full-year KPIs despite macroeconomic headwinds plaguing its frontier markets. A delayed 5 sen DPS has been declared although management has flagged downside risk to the >20 sen target DPS by FY24F, which is likely to be viewed negatively by the market.

• Double-digit earnings growth QoQ/YTD. 9M22 normalised PAT jumped 18% on 7.5% revenue and 31% EBIT growth, partially offset by higher debt assumed for Linknet and edotCo’s Philippine acquisitions and one-off prosperity tax. YTD EBITDA margin held steady at 44.6%. Core earnings saw a 13% QoQ lift as the weaker showing from Ncell, Smart and Robi (Bangladesh) more than offset by other operating units and maiden contribution from Linknet. We raise FY22F-24F core earnings by 11-14%, mainly to factor in stronger edotco and Linknet contributions.

• Celcom continues to execute well with core EBITDA and PAT up double-digit. Service revenue grew 2% YTD on strong prepaid growth (+4.8%) and contributions from new B2B businesses. EBITDA was up 12.4% while PAT jumped 65% on good cost controls.

• Economic situation on the mend in Sri Lanka; no plans to merge mobile and broadband business in Indonesia. Management has ruled out the potential merger of XL Axiata (EXCL IJ, BUY, TP: IDR3300) with Linknet (LINK IJ, NR) as it believes operational synergies can still be captured from the existing (independent) platforms. In Sri Lanka, the regulator’s approval of tariff hikes (from September) is supporting the recovery in Dialog’s revenue and EBITDA QoQ with lower network cost and continued market share gains. The group’s digital financial services segment (Boost) posted lower EBIT losses QoQ/YTD, driven by the money lending business.

• Transitory spike in balance sheet leverage. While group gross debt/EBITDA has reached a high of 3.2x in 3Q22 (net debt/EBITDA: 2.6x) from acquisition debt, the impact is temporary with cash proceeds due from the impending completion of the Digi-Celcom merger (MYR1.9bn) and the repayment of shareholder advance from Celcom (MYR2.4bn).

Source: RHB Research - 29 Nov 2022