Axiata Group (Axiata) made a surprise announcement that it intends to exit from Nepal, leading to the classification of Ncell as “asset held-for-sale” and “discontinued operations”. As a result, a provision on impairment of assets amounting to RM1,013.8m was recognised in 3QFY23 following its decision to exit from the Nepal mobile market. Axiata would have posted 3QFY23 headline net loss of RM797.4m if Ncell remained a continuing operation. With Ncell being classified as discontinued operation, Axiata’s headline net profit was stated at RM27.1m for 3QFY23 while 9MFY23 remained a loss of RM141m. Although this has no impact on cashflow, Axiata’s retained earnings suffered a loss of RM1,299.8m. The transaction is expected to be completed within 12 months from 29 September 2023 (date of approval by the Board). Although share price has fallen by 22% since our downgrade in May 2023, we continue to rate the stock Underperform given the uncertainties of its operations in the frontier markets. Our SOTP-based TP is revised down to RM2.00.

• Results review. Normalised net profit for 9MFY23 came in at RM255.2m, making up about 62% and 52% of our and consensus full-year estimates respectively. The shortfall was mainly due to lower-than-expected contribution from fixed broadband business in Indonesia (Link Net) and infrastructure segment (edotco). We revise down our FY23-25F earnings forecasts by an average of 11% to factor in lower contribution from Link Net and edotco. On a QoQ comparison, 3QFY23 revenue was down 5% as the increase in Axiata Digital revenue was offset by lower contribution from Sri Lanka and infrastructure segment. However, normalised 3QFY23 net profit jumped from RM44m in 2QFY23 to RM128m, mainly driven by lower operating cost and depreciation cost in Bangladesh and Sri Lanka. We note that losses at Link Net have widened from RM17.1m to RM34m due to lower revenue and higher depreciation and amortisation charges while edotco posted a loss of RM2m from RM15.2m profit in the previous quarter on higher operating cost.

• Exiting Nepal mobile market. Axiata holds an 80% stake in Ncell, which was acquired in December 2015 for USD1.37bn (or RM5.88bn). Since the acquisition, the journey in Nepal has not been smooth-sailing due to Axiata’s dispute with the government of Nepal over capital gain tax that led to subsequent settlements involving RM396.1m of capital gain tax and RM491.8m of impairment. Operationally, Ncell has been suffering from years of falling revenue and rising operating cost. YTD 2023, the total impairment of assets for Ncell amounted to RM1,865m. Although we think this potential exit is positive for Axiata given the removal of further operational risk in Nepal, it is a testament to our concern regarding its aggressive investment in high-risk markets.

• Outlook. While Axiata’s latest acquisitions in Indonesia and the Philippines would allow the Group to diversify further into high-growth markets, we believe these expansions are not likely to make any meaningful earnings contribution in the near term, due to the sizeable funding requirement. In addition, we see challenges for Axiata to expand customer base and market share as it faces stiff competition from the incumbents. We continue to be wary of its other investments and operations in these frontier markets.

Source: PublicInvest Research - 30 Nov 2023