Axiata Group Bhd
(Oct 27, RM7.08)
Maintain “hold” with target price (TP) of RM7.20: With rebounds at Celcom Axiata Bhd and PT XL Axiata Tbk (XL), we see stronger earnings for Axiata in financial year 2015 (FY15) but consensus numbers appear to have factored this in.

On the negative side, we believe Axiata is likely to keep its capital expenditure (capex) high in FY15 to improve its data network quality, which could surprise the market.

We cut our FY14 to FY16 core net profit forecasts by 1.8 to 11% for lower estimates for Celcom and XL. Despite this, our sum-of-parts-based TP stays at RM7.20 as we now factor in higher valuations for Idea Cellular Ltd, Robi Axiata Ltd and Smart Axiata Co Ltd.

We maintain our “hold” call. The key upside risk is stronger-than-expected earnings at Celcom and XL while the key downside risk is sustained high capex in the medium term.

We expect Celcom’s earnings before interest, taxes, depreciation and amortisation (ebitda) to rebound 5.3% in FY15, compared with FY14 with a decrease of 4.4%, driven by new product launches after fixing its information technology and network issues, positive impact of the goods and services tax impact, and healthy growth in data revenues, given a more visible pickup in usage among its subscribers in recent quarters.

For XL, we forecast ebitda to recover 7.8%, compared with a decrease of 0.4% in FY14, on strong growth in data, rising tariffs and cost rationalisation at PT Axis Telekom Indonesia or Axis even though margin improvement will be held back by the additional tower leaseback cost from Indonesia’s PT Solusi Tunas Pratama Tbk.

Overall, we forecast group ebitda growth of 6.6% in FY15 and 8.1% in FY16, compared with a decrease of 2.7% in FY13 and a decrease of 0.5% in FY14 forecast.

We believe Axiata needs to sustain high network investments for all its operating subsidiaries in FY15 to remain competitive as a good data experience is increasingly important to subscribers.

As such, we raise our FY15 capex assumption by 16% to RM4.4 billion (capex/sales: 22%), which is higher year-on-year (y-o-y). Thereafter, we forecast capex to ease y-o-y to RM3.9 billion in FY16 (capex/sales: 19%).

With the higher capex, we forecast free cash flow per share to come in at only 14 sen to 17 sen in FY14 to FY15, before rising to 30 sen in FY16. Despite that, we believe Axiata will still be able to raise its dividend payout ratio gradually to between 80% and 90%, translating into dividend per share (DPS) of 26 sen to 32 sen (yield: 3.6 to 4.5%) in FY14 to FY16. This is because it had RM3.2 billion cash sitting at the holding company or at Celcom level at end-June 2014, with sufficient room in the balance sheet to gear up. Based on our DPS forecast, Axiata’s net debt or ebitda is set to rise from 0.97 times at end-FY13 to a still manageable 1.07 times at end-FY14 and 1.13 times at FY15, before easing to 1.07 times by end-FY16. — CIMB Bank, Oct 27

This article first appeared in The Edge Financial Daily, on October 28, 2014.