FY18: Challenged by Headwinds and Higher D&A HOLD. Last Traded: RM4.25

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1 R E S U L T S U P D A T E Monday, February 25, 2019 FBMKLCI: 1, Sector: Telecommunications THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Axiata Group Berhad TP: RM4.50 (+5.9%) FY18: Challenged by Headwinds and Higher D&A Last Traded: RM4.25 HOLD Wilson Loo, CFA Tel: wilsonloo@ta.com.my Review Axiata reported a net loss of RM5.0bn in FY18 (versus net profit of RM0.9bn in FY17). However, stripping off chunky exceptional items amounting to RM6.0bn, core net profit of RM1.0bn (-16.2% YoY) came within ours but above consensus estimates at 96.2% and 179.7% respectively. The chunky exceptional items of RM6.0bn were mainly non-cash and related to 1) Idea-related losses (RM3.9bn) arising from the derecognition and reclassification of investment in Idea from associate to simple investment and dilution loss from the non-participation in the issuance of new Idea shares, 2) legacy asset write-offs (RM1.8bn) in 4QFY18 (mainly at Celcom and XL) and 3) forex and derivative losses (RM0.5bn). A second interim dividend of 4.5sen/share was declared. YTD s of 9.5sen/share (+11.8% YoY) translates to a payout of 85.5% which is in line with management s guidance for a reversion to FY15 s level of 85%. Overall, FY18 s revenue, EBITDA and core net profit declined 2.1% YoY, 9.7% YoY and 16.2% YoY. While all opcos except for Robi and Ncell recorded revenue growth on a constant currency basis, the group s bottom line was challenged by currency headwinds (due to the appreciation of the ringgit) and higher depreciation and amortisation mainly at Celcom and XL. Notwithstanding, we expect to see improved profitability in FY19 with the legacy asset write-offs (RM1.8bn) in 4QFY18 expected to reduce depreciation and amortisation costs by RM150mn/annum as well as from continued cost optimisation. Cost optimisation of RM1.5bn in FY18 was ahead of the RM1.4bn target, arising from lower network and sales and marketing cost. Celcom. FY18 s revenue grew 1.1% YoY with higher ARPU achieved across both the postpaid and prepaid segments alongside the focus on high value customers. EBITDA and net profit declined 4.5% YoY and 64.5% YoY mainly due to the write-off of legacy asset, higher depreciation and amortisation and one-off charge from a voluntary separation scheme which is expected to yield savings of ~RM50mn/annum. XL. XL reported a net loss of Rp3,297bn in FY18 mainly due to the write-off of legacy asset, excluding which it was close to breaking even point with a net loss of Rp9bn. Revenue and EBITDA increased 0.4% YoY and 2.3% YoY. While top line growth was flattish, it was ahead of the industry which was challenged by heightened competition to capture market share during the prepaid SIM registration exercise (completed on 1 May 2018). Positively, XL returned to the black in 4QFY18 with a core PAT of Rp58bn aided by a recovery in pricing post prepaid SIM registration. We expect XL to turn profitable in FY19 on the back of continued traction with its data-led strategy and expansion in ex-java. Share Information Bloomberg Code AXIATA MK Stock Code 6888 Listing Main Market Share Cap (mn) Market Cap (RMmn) 38, wk Hi/Lo (RM) 5.66/ mth Avg Daily Vol ('000 shrs) 4,922.3 Estimated Free Float (%) 23.3 Beta 1.8 Major Shareholders (%) Khazanah Nasional Bhd EPF Skim Amanah Saham Bumiputera Forecast Revision FY19 FY20 Forecast Revision (%) 0.7 (0.2) Net profit (RMmn) 1,342 1,605 Consensus 1,299 1,559 TA's / Consensus (%) Previous Rating Buy (Downgraded) Financial Indicators FY19 FY20 Net debt/ebitda (x) CFPS (sen) P/CFPS (x) ROAA (%) ROAE (%) NTA/Share (RM) Price/ NTA (x) Scorecard % of FY vs. TA 96.2 Within vs. Consensus Above Share Performance (%) Price Change Axiata FBM KLCI 1 mth (7.0) (1.9) 3 mth (10.3) (0.9) 6 mth (4.3) mth (2.5) 4.4 (12-Mth) Share Price relative to the FBMKLCI Source: Bloomberg Page 1 of 7

2 Dialog. Driven by the mobile, fixed and pay-tv segments, FY18 s revenue, EBITDA and core net profit grew 15.2% YoY, 17.4% YoY and 15.8% YoY. Despite the abolishment of floor rate on mobile voice services in 3QFY18, 4QFY18 s revenue grew 1.9% QoQ, supported by subscriber growth and data monetisation as smartphone penetration (55%, +1pp YoY) and data usage continued on an uptrend. Meanwhile, the 36.7% decline in FY18 s net profit was mainly due to one-off asset impairment and accelerated depreciation in 4QFY18 as well as forex losses. Robi. In FY18, Robi recorded service revenue increased 9.5% YoY on the back of its 4G rollout supporting growth in its subscriber and smartphone penetration rate (41%, +2pp YoY). EBITDA grew at a faster pace, up 31.6% YoY, due to lower direct costs. Bottom line however remained in the red due to higher finance cost. Management alluded that it is looking to optimise the finance cost and maintained its target to return to profitability in Ncell. Challenged by the downtrend in international long-distance (ILD), the Telecommunications Service Charge in July 2018 and increase in corporate tax rate, FY18 s revenue, EBITDA and PAT fell 1.0% YoY, 4.9% YoY and 19.0% YoY. The decline in revenue was cushioned by a 5.4% increase in core mobile revenue on the back of growing smartphone penetration (59%, +799 YoY) and data monetisation. Smart. FY18 s revenue and EBITDA grew 7.2% YoY and 6.0% YoY, driven by data revenue which accounted for 60% (+8.5pp YoY) of revenue. PAT fell marginally 0.8% YoY due to higher regulatory cost and one-off asset write-off. edotco. FY18 s revenue increased 12.8% YoY on an enlarged tower portfolio (+10.3% YoY) and improved tenancy ratio from 1.57x to 1.62x. EBITDA was flat due to one-offs for business expansion (e.g., advisory fees and regulatory cost). Digital Businesses. Core digital ventures, namely Boost (digital financial services), ada (digital advertising), and apigate (digital platforms) gained traction with growing users and customers. Meanwhile, non-core digital ventures will be placed under an asset management firm, transacted at US$140mn. Impact Imputing FY18 figures into our model, our FY19/FY20 earnings estimates are revised marginally by +0.7%/-0.2% to RM1,342mn/RM1,605mn. We also introduce our FY21 earnings estimate of RM1,840mn. Outlook KPI s for FY19 (on a pre-mfrs 16 basis) were introduced with revenue to grow by 3-4%, EBITDA to grow by 5-8%, and ROIC at %. CAPEX is budgeted at RM6.8bn. As highlighted during its Analyst & Investor Day 2018, in the near-term (2019 and 2020), the group will be shifting gears towards a focus on profitable growth and cash while maintaining its overall vision to be the Next Generation Digital Champion by 2021/2022. Hence, this will see 1) EBITDA growth prioritised over revenue growth, 2) continued opex and capex optimisation, 3) reprioritisation/rescoping of investments (e.g., limiting losses from digital businesses), 4) funding of investments in new growth areas via strategic partnerships/financial investors), 5) monetisation of investments, 6) acceleration of structural Page 2 of 7

3 changes and 7) impairment of legacy assets. Notwithstanding, there remains risks from regulatory and tax related, heightened competition and capex pressure. With regards to news on Axiata being ordered to pay Capital Gains Tax for Ncell, management reiterated that it has thus far not received a written order from Supreme Court of Nepal and is awaiting further clarity on the matter. Valuation Our TP for Axiata is maintained at RM4.50/share based on a SOP valuation, implying an EV/EBITDA of 6.3x against CY19 EBITDA. However, with the narrowed upside potential following the recent run up the stock s price, we downgrade our recommendation to Hold. Key risks include headwinds from currency and interest rate volatility, regulatory uncertainties and heightened competition. Table 1: Earnings Summary (RMmn) FYE Dec FY17 FY18 FY19F FY20F FY21F Revenue 24,402 23,886 25,456 26,672 27,922 EBITDA 9,230 8,334 9,626 10,185 10,760 EBITDA margin (%) Dep. & amortisation (5,988) (7,080) (5,885) (5,988) (6,066) EBIT 3,242 1,255 3,741 4,197 4,694 Net finance costs (1,012) (1,051) (974) (918) (909) JV/Associates (404) (428) (200) (190) (180) EI 110 (4,121) Profit before tax 1,936 (4,346) 2,568 3,088 3,605 Taxation (774) (902) (969) (1,147) (1,325) MI (253) 213 (256) (336) (440) Profit after tax 909 (5,035) 1,342 1,605 1,840 Core profit 1,205 1,010 1,342 1,605 1,840 EPS (sen) EPS growth (%) (15.1) (16.2) PER (x) EV/EBITDA (x) DPS (sen) Dividend yield (%) Table 2: Valuation Matrix Equity Value (RM mn) Stake Effective Equity Value (RM mn) Value/Share (RM) % of SOP Valuation Method Celcom (Malaysia) 18, % 18, % DCF: WACC 8.1%, TG: 1.0% XL Axiata (Indonesia) 16, % 11, % DCF: WACC 8.9%, TG: 3.0% Ncell (Nepal) 6, % 4, % 10x CY19 EPS edotco 7, % 4, % EV/EBITDA: 12x CY19 EBITDA Vodafone Idea (India) 18, % 1, % Consensus TP Dialog Axiata (Sri Lanka) 2, % 2, % Consensus TP Robi (Bangladesh) -1, % -1, % DCF: WACC 14.9%, TG: 5.0% Smart (Cambodia) 2, % 1, % 10x CY19 EPS Holding Co Net Cash -2, % Total 40, Page 3 of 7

4 Figure 1: Forward PE Figure 2: Forward EV/EBITDA x sd: 34.8x +1sd: 41.1x x sd: 9.2x Mean: 8.0x sd: 28.4x 6.0-1sd: 6.7x Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Source: Bloomberg, TA Securities Source: Bloomberg, TA Securities [THE REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK] Page 4 of 7

5 Table 3: FY18 Results Analysis (RMmn) FYE Dec 4QFY17 3QFY18 4QFY18 QoQ (%) YoY (%) FY17 FY18 YoY (%) Revenue 6,261 6,003 6, ,402 23,886 (2.1) EBITDA 2,325 2,171 2,084 (4.0) (10.4) 9,230 8,334 (9.7) Dep. & amortisation -1,517-1,496-2, ,988-7, EBIT (199.6) (183.2) 3,242 1,255 (61.3) Finance income (11.1) (8.4) Finance cost ,253-1, JV/Associates (107.7) Others , , ,121 (3,857.2) PBT ,711 (548.3) (516.7) 1,936-4,346 (324.4) Tax MI (771.2) (562.5) (184.1) PAT (-MI) ,662 (1,358.4) (6,821.6) 909-5,035 (653.6) Core net profit (48.0) (20.8) 1,205 1,010 (16.2) Celcom (38.8) (42.3) (20.9) XL (2.8) (136.8) (247.7) Dialog (5.0) Robi (27.0) Smart (10.5) (26.0) Ncell (1.8) (7.1) Others (41.8) (34.5) Capex 1,949 1,056 1, (3.6) 6,265 6,127 (2.2) Core EPS (sen) (48.0) (20.8) (16.2) DPS (sen) n/a Profitability ratios (%) pp pp pp EBITDA margin (2.9) (3.9) (2.9) EBIT margin (10.7) (22.0) (23.6) (8.0) PBT margin (27.3) (33.7) (33.9) 7.9 (18.2) (26.1) Core net profit margin (2.7) (0.7) (0.7) Tax rate (18.1) (69.5) (93.2) 40.0 (20.7) (60.7) FYE Dec 4QFY17 3QFY18 4QFY18 QoQ (%) YoY (%) FY17 FY18 YoY (%) Celcom (RMmn) Revenue 1,748 1,674 1, (4.2) 6,593 6, EBITDA (4.7) 2,317 2,213 (4.5) EBITDA margin (%) (0.2) (2.0) PATAMI (185.5) (166.8) 1, (64.5) Core PATAMI (38.8) (42.3) (20.9) Core PATAMI margin (%) (5.5) (5.7) (10.3) Postpaid 2,822 2,889 2, Prepaid 6,724 6,341 6, ARPU (RM) % % Postpaid Prepaid XL (Rpbn) Revenue 5,975 5,874 6, ,901 23, EBITDA 2,120 2,176 2, ,321 8, EBITDA margin (%) PAT ,152 4,903.2 (2,400.7) 376-3,297 (976.9) Core PAT (422.2) (85.4) (101.2) Core PAT margin (%) 6.7 (0.3) (5.7) 3.2 (0.0) (3.3) Postpaid , Prepaid 52,806 52,905 53, ,079 ARPU (IDR '000) % % Postpaid (7.2) Prepaid (6.1) Page 5 of 7

6 FYE Dec 4QFY17 3QFY18 4QFY18 QoQ (%) YoY (%) FY17 FY18 YoY (%) Dialog (SLRmn) Revenue 24,801 27,771 28, , , EBITDA 9,115 10,472 9,477 (9.5) ,866 39, EBITDA margin (%) (4.2) (3.3) PAT 3,171 1, (109.0) (104.2) 10,784 6,829 (36.7) PAT margin (%) (0.5) (5.7) (13.3) (5.2) Postpaid 1,299 1,368 1, Prepaid 11,498 12,001 12, ARPU (SLR) % % Postpaid 1,139 1,071 1, (2.9) Prepaid Robi (BDTmn) Revenue 18,595 17,519 17, (5.1) 68,347 67,982 (0.5) EBITDA 3,735 4,688 4, ,010 16, EBITDA margin (%) PAT -1,348 4, (119.4) (28.6) -2,843 2,147 (175.5) PAT margin (%) (7.2) 28.3 (5.5) (33.8) 1.8 (4.2) Postpaid Prepaid 42,498 46,287 46, ,918 ARPU (BDT) % % Postpaid (10.0) (32.3) Prepaid (2.5) (3.3) Ncell (NPRmn) Revenue 15,328 14,121 13,820 (2.1) (9.8) 58,054 57,465 (1.0) EBITDA 9,752 8,984 7,850 (12.6) (19.5) 37,306 35,473 (4.9) EBITDA margin (%) (6.8) (6.8) (2.5) PAT 4,480 4,926 1,942 (60.6) (56.7) 18,871 15,280 (19.0) PAT margin (%) (20.8) (15.2) (5.9) Postpaid Prepaid 16,028 16,246 16, ARPU (BDT) % % Postpaid (0.2) 34.5 Prepaid (2.1) (9.9) edotco (RMmn) Revenue ,547 1, EBITDA (7.3) (0.2) EBITDA margin (%) (3.8) (3.1) (5.1) PAT (65.4) (8.5) PAT margin (%) (12.1) (1.3) Net adds Net adds Tenancies ('000) 25,878 28,779 29, ,694 Towers ('000) 16,533 17,791 18, ,697 Managed sites ('000) 10,931 11,287 11, Tenancy ratio (x) Page 6 of 7

7 (THIS PAGE IS INTENTIONALLY LEFT BLANK) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Monday, February 25, 2019, the analyst, Wilson Loo, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 7 of 7