Following the disposal of its largest earnings generator, Axiata Group’s (Axiata)  1QFY23 reflected the absence of Celcom as a subsidiary, resulting in core net profit falling to RM83.2m. The results came in significantly below our and consensus full-year estimates of RM1.2bn and RM1.3bn respectively. The discrepancy was largely due to losses incurred by its recently-acquired fixed broadband company in Indonesia (Link Net), Dialog in Sri Lanka and Boost. Contribution from edotco was also lower-than-expected due to higher depreciation and financing costs. Given this disappointing set of results, we slash our FY23-25F earnings forecasts by an average of 40%. Consequently,  we revise down our SOTP-based TP to RM2.40 and downgrade Axiata to  Underperform. Although the group has completed several acquisitions in high-growth emerging markets last year, we do not expect them to make any meaningful earnings contribution to compensate for the loss of income from  Celcom anytime soon. In addition, we are also concerned with regulatory and investment risks attached to these operations.

• 1QFY23 revenue rose 7.9% YoY, mainly driven by higher contribution from XL Axiata in Indonesia as well as new revenue stream coming from  Link Net and tower operations in the Philippines. XL Axiata saw revenue growth of 12% YoY, lifted by stronger prepaid data revenue. However, this  was partly offset by lower revenue contribution from Sri Lanka and Nepal.

• Posting a core net profit of only RM83.2m. Bottomline was largely dragged by losses incurred by Link Net, Dialog and Axiata Digital (Boost).  Link Net was affected by higher churn rate while marketing, financing and depreciation costs have increased. Dialog was hit by escalated cost while  Boost was dragged by higher depreciation and financing cost. Its infrastructure business, edotco, posted higher topline due to new  acquisition of towers but this was offset by higher depreciation and  financing cost as well.

• Outlook. Axiata’s expansion in Indonesia and the Philippines has enabled the Group to diversify into high-growth emerging markets. However, we believe they are not likely to make meaningful earnings contribution in the near term, due to the sizeable funding requirement during the acquisitions.  In addition, we see challenges for Axiata to expand customer base and market share as it faces stiff competition from the incumbents. Given a lofty  investment cost, we are also concerned of impairment risk in the distant future, judging from its past ventures into high-growth markets such as  Nepal, Sri Lanka and India.

Source: PublicInvest Research - 26 May 2023