Axiata Group Bhd
(Feb 26, RM7.17)
Maintain neutral with a higher target price (TP) of RM7.65: Axiata’s financial year ended Dec 31, 2014 (FY14), earnings fell slightly short of expectations due to the well-flagged IT issues at Celcom Axiata Bhd (Celcom) and the weak Indonesian rupiah rates. Maintain “neutral”, with a higher sum-of-parts (SOP)-based TP of RM7.65 (6.7% upside).

Axiata is cautiously optimistic on its 2015 outlook, and will be aggressively growing its data pie and profitability. It expects Celcom’s earnings to normalise in the second half of FY15 (2HFY15) while the growth at its other operating companies should help bolster earnings.

Axiata’s FY14 normalised net profit fell slightly below expectations, coming in at 92% of our and consensus estimates. The results were characterised by prolonged IT issues that impeded Celcom’s ability to compete in 2014, and the dilution in earnings before interest, taxes, depreciation and amortisation (Ebitda) arising from the integration between PT XL Axiata Tbk (XL) and loss-making PT Axis Telekom Indonesia alongside the depreciation of the Indonesian rupiah. This was partially offset by the stronger performance of its other operating companies.

Celcom’s revenue fell 3.6% year-on-year (y-o-y) in FY14, driven by continued erosion in SMS (-27.8%) and voice (-5.3%) revenues. The full-year dividend per share of 22 sen (84% payout) declared is similar to FY13, with the management reiterating its commitment to maintaining a progressive dividend payout.

On the 2015 outlook, the management’s key performance indicators guidance of 4% revenue and Ebitda growth for 2015 is broadly in line with its peers. Dividend payout ratio is expected to be sustained at 75% to 85% of core earnings. The aggressive capital expenditure budget of RM4.8 billion for FY15 will largely be spent on growing its data segment across all operating companies. On Celcom, we believe earnings are likely to only normalise from 2HFY15 due to the impact of last year’s East Coast floods and teething issues from the IT transformation programme.

We have trimmed our FY15/FY16 earnings by 15% after updating our FY14 figures. We have also introduced our FY17 numbers.

Our SOP-based TP is increased to RM7.65 (from RM7.20) after rolling over our valuation period and revising some key discounted cash flow assumptions for Celcom. Axiata remains our preferred pick in Malaysia’s telco space. We believe that Celcom and XL earnings should start to normalise from 2HFY15. The growth in its other operating companies should also remain resilient, thus bolstering the group’s overall growth. Axiata also still has room to pay out more dividends versus its peers. — RHB Research, Feb 26

This article first appeared in The Edge Financial Daily, on February 27, 2015.