This article first appeared in The Edge Financial Daily on September 3, 2019

Axiata Group Bhd
(Aug 30, RM5.05)
Maintain neutral with a higher target price of RM4: Axiata Group Bhd’s headline net profit for the second quarter of financial year 2019 (2QFY19) was RM204.1 million, compared to a net loss of RM3.4 billion for 2QFY18 due to a one-off provision of loss on its investment in India. Its normalised 2QFY19 net profit stood at RM228.8 million or +5.6% year-on-year (y-o-y) due to stronger contribution from Celcom and Ncell.

For the first half (1HFY19), its normalised net profit of RM437.6 million accounted for 42% and 39% of our and consensus full-year estimates respectively. The lower-than-expected results were mainly due to higher depreciation charges, compelling us to reduce our FY19 to FY21 earnings forecasts by 5% to 6% to factor this in accordingly.

As a result, our discounted cash flow valuation on Celcom increases marginally, leading to an upward revision in our sum-of-parts valuation for the group to RM4 from RM3.95 previously. Axiata’s share price has risen above our fundamental valuation mainly due to positive market sentiments after its proposed merger with Telenor ASA (Telenor) was announced. We had yet to factor this in our valuation as the proposed merger is not definitive and requires regulatory approval. For now, we maintained our “neutral” rating.

Most operating companies reported higher revenues except those in Malaysia and Nepal. Malaysia’s Celcom was impacted by a declining customer base, particularly in the prepaid segment, while Ncell was affected by the telecom service charge and lower international long distance rates. Companies in Indonesia remained the largest revenue contributor, accounting for 29% of the group’s revenue (Malaysia contributed 27%). Revenue from Indonesia rose 15% y-o-y mainly due to strong data growth.

Its core earnings were higher due to stronger contributions from companies in Malaysia (+RM63 million), Indonesia (+RM41 million) and Nepal (+RM26 million). Due to lower domestic network access rates, Celcom posted a sharp decline in direct cost, from 31% of revenue for 2QFY18 to 21% for the current quarter, but its depreciation cost increased from 12.6% to 20.3% due to the adoption of Malaysian Financial Reporting Standards 16. Its earnings growth from the three operating units was partly offset by losses incurred by the digital business, recognised under the others segment with losses expanding from RM143 million to RM250 million.

We believe the current valuation of Axiata had priced in the anticipated merger with Telenor. Recently, news reports — “Axiata-Telenor merger off?” by The Edge and “Rescuing a mega merger” by The Star — have cited a potential fallout of merger talks. If this materialises, we see a downside risk to Axiata’s share price. Nevertheless, Axiata’s management has clarified that the proposed merger is ongoing, with the aim to conclude the deal by year end. — PublicInvest Research, Aug 30