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Friday, November 25, 2016

Brokers Report: Axiata Group - Not Too Depressing Results



Upgrade to BUY from neutral with target price (TP) of RM5.00




Axiata reported normalised earnings of RM506m (-1.7% YoY) for 3Q16, after stripping out accelerated depreciation, forex loss, non-cash accounting adjustment and gain on disposal of tower assets. 9M16 annualised net profit of RM1,341m came in below expectations, accounting for 68% of our and market estimates. We cut our earnings forecasts by 9% and revise down our TP to RM5.00. At 20x forward PER, valuation looks appealing relative to its historical trends, though we are still concerned with the underlying risks attached to its overseas expansions and hence, we are only upgrading Axiata to Trading Buy from Neutral.
  • 3Q16 revenue increased by 7.7% YoY. The increase in group’s revenue was mainly due to contribution from Nepal and higher revenues in Sri Lanka, Bangladesh and Cambodia. However, this was partially offset by lower revenue from Malaysia and Indonesia, which saw a decline of 9.7% and 5.2% respectively. Bangladesh and Cambodia reported higher data revenue while Sri Lanka’s revenue was boosted by mobile and fixed line business, which rose 9.2% and 32.5% respectively. Celcom’s subscriber base was largely unchanged QoQ but ARPU improved by 5% QoQ. All other units delivered higher subscriber base QoQ except Robi (Bangladesh), although its ARPU expanded by 14.8% QoQ.
  • 3Q16 normalised earnings dropped marginally by 1.7% YoY as the decline in Malaysia and associates earnings were offset by stronger contribution in Sri Lanka, Bangladesh and Cambodia, coupled with new earnings stream from Nepal. Associate and joint venture contributions fell sharply by 103.2% as a result of poor performance at Idea (India). As expected, Idea was hit by stiffer price competition following the entry of a new player, Jio, in the mobile market. Note that in October, Idea was fined c.RM594m by the regulator for unfair market practises and this could suggest further deterioration in Idea’s earnings performance in 4Q16. Meanwhile, M1 is also affected by the anticipation of a 4th mobile player entering the Singaporean mobile market.
  • Upgrading to Trading Buy. We are cutting our FY16-18F earnings forecasts by 9% to factor in i) lower ARPU for Celcom ii) higher network cost as capex increases and iii) lower contribution from Idea and M1 due to tougher competition. Hence, our DCF-based TP is revised down from RM5.70 to RM5.00. Axiata’s share price has fallen sharply and we believe this was due to concerns over its other operating units (growing competition, regulatory and investment risks) as well as foreign selling pressure in anticipation of US rate hike. Axiata is now trading at 20x forward PER, below its historical PER of 22x (Chart 3).

Source: PublicInvest Research - 25 November 2016

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