Axiata’s growth seen driven by XL earnings recovery

Maintain hold with an unchanged target price (TP) of RM4.95: Axiata Group Bhd’s second financial quarter ended June 30, 2018 (2QFY18) normalised profit after tax and minority interest (Patmi) dropped 43% year-on-year (y-o-y) to RM264 million due to higher depreciation and amortisation charges following aggressive investment in data over the past two years, an absence of tax benefits enjoyed in FY17 and higher investment in digital businesses.

For the headline figure, Axiata posted a net loss of RM3.36 billion due to a RM3.38 billion provision on reclassification of Idea Cellular (India) from being an associate to a simple investment arising from Idea’s merger with Vodafone.

To recap, Axiata did not participate in Idea’s new issuance of shares, resulting in its stake being cut from 19.7% to 16.3%. The provision was a non-cash technical impairment.

Quarterly revenue increased 4.6% y-o-y to RM6.3 billion as all operating companies recorded higher revenue and market share.

The group’s 2QFY18 normalised Patmi dropped 22.5% quarter-on-quarter (q-o-q) due to higher depreciation. However, quarterly revenue climbed 3.8% q-o-q, while earnings before interest, taxes, depreciation and amortisation (Ebitda) rose 5.6%.

Celcom’s (Malaysia) normalised Patmi dropped 17% q-o-q to RM156 million due to higher depreciation. Meanwhile, XL (Indonesia) fell into the red, with a loss of RM19 million due to higher depreciation as well.

Robi’s (Bangladesh) loss narrowed to RM8 million, while other operating companies (Dialog, Smart and Ncell) posted flat earnings.

Total borrowings were slightly higher at RM18.7 billion (versus RM18.2 billion in 1QFY18) as net debt/Ebitda was flat at 1.52 times versus 1.53 times in 1QFY18.

Axiata declared an interim dividend of five sen. We expect a full-year dividend of 9.4 sen.

The group’s first half of FY18 normalised Patmi of RM591 million (-24% y-o-y) came within our expectations after accounting for 51% of our FY18 estimate.

Its six-month revenue of RM12.5 billion (+5% y-o-y) was also within forecasts after making up 50% of our FY18 forecast. As such, we are keeping our forecasts for FY18 and FY19.

We maintain “hold” with an unchanged TP of RM4.95 based on sum-of-parts valuation. Growth will be driven by XL’s earnings recovery and ongoing operation efficiencies.

Going forward, edotco’s acquisition of Deodar is expected to be completed in 3QFY18. Management also sees opportunities in 4G roll-outs in Bangladesh and Nepal. — JF Apex Securities Bhd, Aug 27

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