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This article first appeared in The Edge Financial Daily on August 2, 2017

Axiata Group Bhd
(Aug 1, RM4.66)
Maintain neutral call with a target price (TP) of RM4.70:
Axiata Group Bhd’s (Axiata) Indonesian unit PT XL Axiata Tbk reported a second quarter of financial year 2017 (2QFY17) revenue of 5.67 trillion rupiah (RM1.82 billion), growing 8.2% year-on-year (y-o-y) and net profit of 97 billion rupiah growing 73.9% y-o-y.

Stripping out unrealised foreign exchange gain and other one-off charges, normalised net profit stood at 94 billion rupiah versus a loss of nine billion rupiah in 2QFY16.

The sharp improvement in earnings was driven by higher data revenue and lower depreciation charges.

At the earnings before interest, taxes, depreciation and amortisation (Ebitda) level, the first half of FY17 results were broadly in line with our expectations, accounting for 45% of our full-year estimate.

The 2QFY17 service revenue improved by 12.5% y-o-y to 5.03 trillion rupiah, fuelled by higher data revenue, which accounted for 67% of total service revenue compared with only 44% in 2QFY16.

XL Axiata continues to attract data-savvy smartphone subscribers with penetration adding another two percentage points to 67%. Data consumption has been rising steadily with XL Axiata’s traffic more than doubling from a year ago.

Both post-paid and prepaid subscribers increased by 18.8% y-o-y and 12.1% y-o-y to 582,000 and 49.9 million respectively.

Blended average revenue per user (Arpu), however, dropped by 3,000 rupiah to 34,000 rupiah due to lower prepaid Arpu (-8.3% y-o-y). Meanwhile, post-paid Arpu improved by 7.4% to 116,000 rupiah.

The 2QFY17 normalised net profit was at 94 billion rupiah, compared with a loss of nine billion rupiah in 2QFY16.

Apart from higher service revenue, XL Axiata’s bottom line was boosted by an 18.6% decline in depreciation expenses as accelerated depreciation charges were incurred in 2QFY16.

The Ebitda margin dropped from 39.4% to 36.6% but was still within the guidance of high 30s for the current financial year.

We believe Axiata is likely to divest part of its stakes in more profitable overseas units (Sri Lanka, Cambodia and Indonesia) in order to raise funding for future capital expenditure and to pare down borrowing, following the call-off of the planned disposal of M1 Ltd.

We are projecting Axiata’s FY17 forecast earnings to decline by about 7% y-o-y as we believe its performance would be dragged by the challenges facing Celcom and associates in Singapore and India.

We maintain our discounted cash flow-based TP of RM4.70 and “neutral” rating on Axiata. — PublicInvest Research, Aug 1

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