AXIATA’s 9MFY23 results beat our forecast but disappointed the market. It turned around sequentially in 3QFY23 driven by improved numbers from Robi and Dialog. AXIATA expressed its intention to exit Ncell Nepal. We now project a profit in FY23F (vs. a loss previously) and raise our TP by 3% to RM3.55 (from RM3.45). Maintain OUTPERFORM.

Its 9MFY23 core net profit of RM329m trumped our expectation against our full-year net loss forecast of RM238m but disappointed the market at 66% of the full-year consensus estimate. The variance versus our forecast was largely due to lower-than-expected depreciation and financing costs at Dialog and Robi.

YTD earnings grow in tandem with topline. Revenue expansion (+11%) was largely attributed to broad-based expansion across all OpCos, except for ADA. In particular, topline growth was mainly anchored by: (i)XL - on the back of sustained ARPU uplift as well as improved contribution from the data and digital services segment, and (ii) edotco - driven by organic growth at Malaysia and newly acquired towers in the Philippines and Indonesia.

Correspondingly, earnings more than doubled YTD on the back of topline growth, lower taxes (mainly from edotco) and higher contribution from associate, CDB. This more than offset the spike in depreciation and interest costs emanating from: (i) Link Net due to increased borrowings to fund network expansion, and (ii) edotco following the acquisition of PLDT’s towers at the Philippines.

QoQ turnaround was cost driven. Its sequential earnings turnaround was mainly attributed to improved performances from Robi and Dialog on the back of lower depreciation and interest costs. This more than negated higher taxes, widened losses at Link Net, as well as edotco slipping into the red.

Plans to exit Nepal. In 3QFY23, AXIATA reclassified Ncell’s financial results as discontinuing operations. This is underpinned by the ‘highly probable’ sale of Ncell and the Group’s intention to exit Nepal. This decision was driven by challenging business conditions at Nepal for foreign investors. This includes: (i) regulatory uncertainty, (ii) unstable tax legislation (e.g. imposition of arbitrary property gains tax), and (iii) lack of visibility on the extension of Ncell’s operating license following its expiry in 2029. As such, AXIATA is currently engaged in talks with potential buyers for the sale of Ncell. The group plans to have a clean exit which will indemnify it from future liabilities and penalties. Given this condition, AXIATA is willing to compromise and accept lower valuations. The estimated current fair value for Ncell is RM378m which includes forex reserves of RM360m. The latter will fluctuate in accordance with the exchange rate of Nepalese rupee versus MYR. Note that NCell’s book value is net of total impairments totalling circa RM1.9b recognized in 2QFY23-3QFY23. This includes: (i) asset impairment (RM1.5b), and (ii) write-off of capital gains tax related to receivables (RM396m). We are cautiously optimistic that AXIATA has decided to exit Ncell, which is expected to be earnings dilutive in the near-to-medium term. However, we are concerned of subdued sale valuations in future. Nevertheless, moving forward, AXIATA guided that there is low possibility of additional kitchen sinking on Ncell.

The key takeaways from its results briefing are as follows:

1. AXIATA’s guidance for FY23 remains intact given that Ncell is earnings dilutive. To recap, this comprises: (i) revenue growth at mid-single digit (YTD: +11%), and (ii) EBIT growth at high single-digit (YTD: +13%), and (iii) capex of RM7.1b (YTD: RM 3.8b).

2. AXIATA revealed that potential investors are conducting due diligence on edotco. Additionally, the group is also considering the option to de-consolidate edotco or reclassify it as discontinued operations. Hence, this will enable edotco to secure funding at better terms and expand into new markets. At the same time, AXIATA is able to deleverage its balance sheet (net gearing: 0.8x).

3. In the event that edotco is de-consolidated, AXIATA will remain as a substantial shareholder. Additionally, it will place guardrails to ensure that it may exercise substantial control, particularly on dividend policy. As such, when edotco finally turns yield accretive, AXIATA will still receive significant dividends.

4. Despite the current military uncertainties at Myanmar, edotco’s tenants for its towers continue to pay leasing fees. Therefore, at this juncture, AXIATA does not plan to impair these tower assets. On the other hand, AXIATA notes that it is challenging to secure government approval to repatriate funds (if they are of a significant amount).

Forecasts. We now project a profit in FY23F (vs. a loss previously) to reflect lower depreciation and financing costs.

We also raise our TP by 3% to RM3.55 (from RM3.45) as we incorporate our revised TP for CDB and removed NCell in our Sum-ofParts valuation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 7).

We continue to like AXIATA for: (i) its plans to deleverage and strengthen its balance sheet, (ii) growth prospects for OpCos at emerging markets, and (iii) strong asset monetization prospects for edotco and its digital businesses. Maintain OUTPERFORM.

Risks to our call include: (i) strong USD may weigh on the performance of its OpCos at frontier markets (e.g. Robi Bangladesh Dialog Sri Lanka, Myanmar tower assets), (ii) further interest cost drag from continuous rate hikes, and (iii) macro headwinds weighing on Opcos at frontier markets.

Source: Kenanga Research - 30 Nov 2023