Axiata reported 1HFY18 net loss of RM3.5bn as compared to a net profit of RM646mn in the previous corresponding period. However, stripping out chunky exceptional items amounting to RM4.1bn, core net profit of RM591mn (-24.1% YoY) came within ours and consensus estimates at 54.7% and 52.3% respectively. Separately, a first interim dividend of 5.0sen/share was declared.
The exceptional items mainly relate to Idea with respect to: 1) the noncash provision of RM3.4bn from the de-recognition and reclassification of the investment in Idea from associate to simple investment, 2) the noncash dilution loss of RM358mn from the group’s non-participation in the issuance of new Idea shares, and 3) Idea’s operational losses of RM106mn.
Overall, the group’s underlying performance was intact with 1HFY18’s revenue on a constant currency basis up 5.1% YoY whereby generally driven by data revenue, all opcos except for Smart grew and this was led by Dialog (+16.1% YoY) while the rest (Celcom, XL, Robi, and Ncell) reported low-to-mid single digit growth. The 24.1% YoY contraction in core net profit was mainly due to: 1) losses from digital businesses, 2) higher depreciation and amortisation from aggressive network expansion, and 3) tax credits in the previous corresponding period.
Celcom. In 2QFY18, service revenue grew ahead of incumbents, Maxis and Digi, on a QoQ and YoY basis. Postpaid and prepaid subscriber net add momentum sustained QoQ while ARPU was higher YoY alongside the focus on high value subscribers. 1HFY18’s revenue grew 2.9% YoY while EBITDA and PATAMI declined 1.7% YoY and 37.9% YoY. The weak bottom line performance was due to higher depreciation and amortisation (+12.4% YoY) and the gain on disposal of 11street in 2QFY17. Encouragingly, we noted that focus will be placed on cost rationalisation to improve margins.
1HFY18’s revenue and EBITDA growth of 1.1% YoY and 1.7% YoY was ahead of the industry despite challenges from the prepaid SIM registration exercise. This was driven by the group’s data-led propositions. XL however was in the red due to higher depreciation and amortisation (+9.5% YoY) as it has been aggressively expanding its 4G network of late with increasing focus in ex-Java. Positively, with the completion of the prepaid SIM registration exercise on 1 May 2018, a healthier operating environment is envisioned ahead.
Dialog. 1HFY18’s revenue, EBITDA and PAT grew 16.1% YoY, 25.8% YoY and 41.2% YoY, driven by the mobile, fixed and pay-TV operations. We expect Dialog to maintain its robust growth trajectory as there is further room to monetise data revenue with smartphone penetration Robi. While still in the red, 1HFY18’s service revenue and EBITDA increased 9.4% YoY and 39.0% YoY, driven by the robust growth in data revenue (+35.6% YoY). Robi has been ahead of competition in the rollout of 4G with 6,100 sites as at end-2QFY18 (+52.0% QoQ). Encouragingly, losses which was in part due to higher finance cost on the back of rising interest rates had narrowed QoQ as EBITDA margins expanded to 24.5% (+6.5pp QoQ, +8.6pp YoY).
Ncell. 1HFY18’s revenue and EBITDA grew 4.9% YoY and 0.5% YoY despite the continued decline in international long-distance (ILD) revenue (-13.8% YoY) which accounted for ~30% of total revenue. Growth was driven by data revenue (+34.2% YoY) as smartphone penetration (+11pp YoY to 58%) and data consumption continued to climb. While there is downside to margins from a continued decline in ILD, management expects absolute EBITDA to sustain in the near term. In 2QFY18, EBITDA margins contracted to 62.8% (-0.5pp QoQ, -5.2pp YoY).
edotco. 1HFY18’s revenue increased 12.2% YoY. Widespread growth was across all countries with tenancies up 19.7% YoY to 27,518 towers and tenancy ratio improving from 1.47x to 1.59x. At the bottom line however, EBITDA and PAT declined 8.2% YoY and 8.6% YoY mainly due to forex translation, advisory fees and regulatory cost. Meanwhile, the acquisition of Deodar has been delayed to 3QFY18.
Digital Businesses & Associates. The group’s digital businesses remain loss making but have been gaining traction. Of note, ADA, its integrated digital marketing business, had secured USD$20mn of funding from Sumitomo Corporation, giving it an implied value of USD$109mn. As for associates, M1’s 1HFY18 growth was flattish with revenue +1.1% YoY, EBITDA -0.5% YoY and PAT +0.7% YoY while Idea’s losses narrowed from RM135mn to RM95mn due to gains from the tower sale.
Our FY18/FY19/FY20 earnings are revised by +8.0%/+3.7%/+8.8% to RM1.2bn/RM1.5bn/RM1.8bn after removing Idea’s losses under associates, albeit partly offset by higher depreciation and amortisation from higher CAPEX assumptions for Celcom, XL and Robi.
Headline KPIs for 2018 were maintained with revenue and EBITDA growth to be flattish and CAPEX at RM6.9bn. Equally, that on a constant currency basis were maintained, with revenue and EBITDA growth of 6.3% and 5.8% and CAPEX at RM7.4bn. Barring forex fluctuations, we expect 2HFY18 to be driven by the continued turnaround of Celcom and resumed traction at XL with its transformation strategy and the healthier operating environment post completion of the prepaid SIM registration exercise. On the flipside, among others, management is cautious of forex and interest rate volatility from Bangladesh, Indonesia and Sri Lanka.
Our TP for Axiata is lowered to RM5.60/share (RM6.05/share previously) based on a SOP valuation. We continue to like the group for its regional footprint in growth markets. Reiterate Buy.