Stock Pick: Axiata

Axiata-Maintain BUY, Target price of MYR4.84 from MYR4.75, 24% upside, and c.3% yield.

Axiata’s 3Q/9M21 trumped estimates on stronger showing across most operating companies (Opcos) alongside reduced digital losses. RHB sees core earnings rebounding 39% in FY21F, off the low base of a 10% decline in FY20, driven by a rejuvenated Celcom, cost efficiencies, and the earnings inflection at Axiata Digital Services (ADS). Axiata trades at an attractive 3.7x FY22 EV/EBITDA or 1.5SD below the historical mean.

Core earnings surged 30% QoQ in 3Q21 and 67% YTD to MYR914.5m, at 96% of its estimate (consensus: 89%). Growth was fueled by stronger contributions across most Opcos, opex savings (YTD: MYR378m), and lower accelerated depreciation of 3G assets. The key deviations relative to the forecast were lower than expected digital losses and tax expenses. Core YTD EBITDA ticked up 5.5% on 6% revenue growth and was flat sequentially (+0.4% QoQ). RHB management has raised FY21F revenue/EBITDA guidance to mid-single digit growth from ‘low-single digit’ growth with capex guidance upped to MYR6.9bn from MYR5.5bn, mainly on account of the revised guidance from XL Axiata (XL) (EXCL IJ, BUY, TP: IDR3,400).

Celcom in mega form as revenue expanded for the fifth quarter in a row, by 1.3% QoQ and 5% YTD, led by strong prepaid revenue and subs gains. Prepaid revenue grew 2% QoQ which outperformed Maxis (MAXIS MK,
NEUTRAL, TP: MYR4.75) and Digi (DIGI MK, NEUTRAL, TP: MYR4.78)’s flat to 0.3% growth. Excluding the employee restructuring (ERP) charge, Celcom’s 9M21 EBITDA rose 7.3% on cost efficiencies and good cost management
while PATAMI gained 7% (21% excluding ERP and accelerated depreciation).

Other Opcos fared well, save for XL. Dialog’s PATAMI rose 17.2% QoQ and 45.1% YTD while that of Robi surged 85% QoQ and 44% YTD on stronger EBITDA. edotco’s EBITDA gained 3% on 4% revenue growth YTD. XL’s EBITDA improved 1.5% QoQ but flat YTD due to stiff competition. Ncell’s revenue stayed under pressure (-1.1% YTD) as the steep decline in international long distance revenue (-21%) offset core revenue growth of 4%.

ADS losses more than halved. Group digital revenue more than doubled YoY, led by the digital analytics business (ADA). With Boost’s (e-wallet and micro-financing) losses more than halved (9M21: -110m) on lower marketing
spend, ADS losses narrowed 60% to MYR97m (9M20: -243m). Boost is on track to achieve profitability by end-FY22, turning ADS into the black.

Cukai Makmur and the removal of tax exemption on dividend income. We estimate c.MYR100m impact from CM for FY22F based on an earlier guidance. While Axiata foresees some impact from the removal of tax
exemption on the repatriation of foreign-sourced dividend income in 2022, this should be mitigated by the double-taxation agreements with all markets (except Nepal) and should not derail its plan to become a high dividend
company by FY24F. Our TP incorporates a 2% ESG premium.

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