Axiata Group Bhd
(Nov 29, RM4.13)
Maintain neutral with a lower target price of RM4.48: Axiata Group Bhd’s third quarter of financial year 2019 (3QFY19) earnings before interest, taxes, depreciation and amortisation (Ebitda) came in 11.8% year-on-year (y-o-y) higher at RM2.43 billion. This mainly stemmed from an expansion in Ebitda margin to 39.1% (3QFY18: 36.2%). The healthier Ebitda margin was brought about by a revenue growth of 3.5% y-o-y to RM6.2 billion coupled with an ongoing cost excellence programme.

Cumulatively, cumulative nine months of financial year 2019 (9MFY19) Ebitda grew by 11.1% y-o-y to RM6.94 billion. Higher Ebitda contribution was recorded for most of the operating companies with the exception of Ncell Pte Ltd (-10.6% y-o-y). Note that contribution from Ncell is affected by the ongoing impact of consumption levies. All in, the results, came in within our and consensus’ expectations, accounting for 78.1% and 73.6% of full-year FY19 Ebitda estimates respectively.

Despite the commendable improvement seen in the Ebitda levels, 9MFY19 normalised earnings declined by 13.2% y-o-y to RM733 million. This was mainly impacted by higher depreciation, impairment and amortisation charges (+18.3% y-o-y), higher staff cost (+14.6% y-o-y) and higher taxation (+40.1% y-o-y) as well as the absence of M1 Ltd contribution.

9MFY19 capital expenditure (capex) came in 3.2% y-o-y higher at RM4.38 billion. The increase in capex primarily came from Ncell which grew by more than threefold to RM407 million, in view of higher spending on the network cost.

We maintain our Ebitda assumptions at this juncture. However, we adjust our FY19 and FY20 earnings estimates to RM985.9 million and RM1.14 billion respectively by lowering our finance cost and depreciation charges to better reflect the results thus far.

We view that Axiata’s strategy of having a regional presence bears mixed results for the group. It exposes the group to various regulatory issues and execution risks as well as exposure to unfavourable impact on foreign exchange translation for each of the country the group operates in. Fortunately, the ongoing cost excellence programme has bode well for the group as evidently shown in the Ebitda.

Nonetheless, the contraction in its bottom line continues. Coupled with the escalating capex commitment, we expect its dividend yield to remain below 3%. On another note, given the fallout of the mega merger with Telenor Group, we do not foresee such sizeable mergers and acquisitions to take place in the foreseeable term. — MIDF Research, Nov 29