NEGATIVE IMPACT ON AXIATA SEEN
Affin Hwang keeps ‘hold’ call on telco with lower target price of RM3.40
THE turmoil in Sri Lanka is expected to adversely affect Axiata Group Bhd’s earnings and valuation, said analysts. But the telecommunication company (telco) said its operation there was strong enough to tide over the difficult times.
Nevertheless, it acknowledged that the ongoing economic risks of its Sri Lankan operations, via subsidiary Dialog Axiata Plc particularly, as well as regulatory issues in Nepal generally were a concern.
“Axiata is monitoring the situation in Sri Lanka. Our operating company Dialog has been consistently communicating with all stakeholders, including employees, customers, and vendors to manage the potential impact it may have on the business.”
Axiata said it expected some foreign exchange translation impact and unrealised losses to be reflected in its first quarter results.
Dialog’s balance sheet had the requisite capacity and liquidity to continue operations effectively in these difficult times, it added.
“Dialog will be able to sustain itself through this crisis and will continue to exercise prudent financial and operational management to navigate macro uncertainties arising from the current situation.”
Sri Lanka is facing an unprecedented economic crisis with its rupee having depreciated by 42 per cent against the ringgit year to date.
Inflation hit 29.8 per cent last month while the government had suspended foreign debt payments.
Analysts said the high global commodity prices might continue to fuel inflation while prolonged protests could affect the recovery of its tourism industry.
Affin Hwang Capital analyst Isaac Chow said the crisis in Sri Lanka would affect Axiata and Dialog on several fronts, including margin compression (revenue
growth should lag cost inflation) and higher finance costs.
He said the crisis would also result in lower profit in ringgit terms due to currency depreciation, potential increase in taxes and lower free cash flow for the group.
“Dialog Axiata is Sri Lanka’s largest telco and a key contributor to Axiata’s earnings, accounting for 21 to 30 per cent of Axiata’s 2018-2021 normalised profit after tax and minority interest (Patami).
“Last year, Dialog Axiata contributed to 26 per cent of Axiata’s normalised Patami. Hence, we expect Dialog’s earnings contribution
to fall sharply due to the depreciation of Sri Lankan rupee and margin compression,” he said in a report.
Hence, Chow said the research firm was cutting its 2022-2024 earning forecasts by 13 to 15 per cent after incorporating a lower earnings contribution from Dialog.
“We maintain our ‘hold’ call on Axiata with a lower target price of RM3.40 from RM3.85 previously.
“The regulatory risks in several markets, rising interest rate and uncertainties in regional economic growth will likely continue to weigh on Axiata’s business operations,” he added.