CIMB Research retains hold for Axiata, target price RM4.85

KUALA LUMPUR: CIMB Equities Research is retaining its hold call for Axiata with an unchanged sum-of-parts based target price of RM4.85. 

It said on Monday a more significant earnings recovery at Celcom/XL/Robi and narrower digital investment losses are key indicators the market will watch for before turning more positive on Axiata.

“Axiata’s FY19F EV/OpFCF (enterprise value/ operating free cashflow) of 15.9 times is in line with the Asean telco average. Dividend yields are 2.1-3.7% in FY18-20F. Upside/downside risks: faster-than-expected earnings recovery at Celcom and XL/keener competition,” it said.

CIMB Research said Axiata’s 2Q18 core EPS (pre-MFRS 15) jumped 48.1% on-quarter (-16.8% on-year) as Idea turned profitable from a one-off tower sale and narrower share of Robi’s losses, which were partly offset by weaker earnings from Celcom, XL and Dialog. 

“1H18 core EPS was largely in line at 46% of our FY18F forecast (Bloomberg consensus: 40%); we expect 2H18F to be stronger as Idea will cease to be equity accounted. 1H18 DPS was 5.0 sen (1H17: 5.0 sen), or an 86% payout,” it said.

Celcom’s service revenue trend outperformed peers, it said. The 2Q18 service revenue rose a promising 3.0% on-quarter (+3.6% on-year), better than Maxis’s/Digi’s +1.6%/steady on-quarter. 

Prepaid ARPU was up 2.9% on-quarter (+12.9% on-year), while subs also grew (+17,000 on-quarter). EBITDA rose 6.8% on-quarter (-1.8% on-year), with margin up 1.2% pts on-quarter due to some cost normalisation. 

However, the higher-than-expected depreciation and effective tax rate dragged core net profit lower by 15.1% on-quarter. 

“Axiata says cost-cutting initiatives are under way, including right sizing the staff force, with savings to be seen in FY19F.

As for Robi, its negative earnings contribution narrowed significantly to RM7m in 2Q18 (1Q18: - RM61m, 2Q17: +RM30m), despite a further increase in interest cost.  Robi has targeted further improvement in EBITDA margin to c.25- 27% by year-end (1H18: 26.1%).

“Axiata’s losses from digital investments widened to RM100m in 2Q18 (1Q18: -RM80m). However, management expects this to taper off in 2H18F as it will try to contain the losses to its initial guidance of RM200m-250m for the full year. 

“Axiata expects losses to be roughly the same in FY19F, before turning profit after tax neutral/accretive from FY20F,” it said.

CIMB Research said XL’s 2Q18 losses widened to RM38m (1Q18: -RM21m, 2Q17: -RM6m) due to higher interest cost, while 1Q18 also enjoyed positive tax credits. 

Similarly, Dialog’s contribution was 9.8% weaker on-quarter (+19.4% on-year) at RM74m due to higher depreciation.

Smart’s contribution rose slightly by 3.6% on-quarter (-18.6% on-year) to RM57m from higher revenue (more stable competition). 

Ncell’s earnings also rose 4.6% on-quarter (-10.7% on-year) to RM159m due to seasonally stronger revenue, on the back of steady EBITDA margin.