AXIATA GROUP BHD

By CGS-CIMB Research Rating: Hold (maintained) Target price: RM4.35

CGS-CIMB Research expects mobile service operator Celcom, a subsidiary of Axiata, to record muted earnings growth in the second half of financial year 2019 (2H19), amid tight competition and challenging market conditions.

Following the move by industry peers to raise their data or video quotas in the June to September period in the low- to mid-end postpaid segment, Celcom has reacted with its new Xpax XP Lite plan in mid-september.

Meanwhile, in the prepaid segment, competition has also been intense, with plan enhancements or new aggressive offers by Digi and Tunetalk.

Commenting on Axiata’s costs, CGS-CIMB Research said that it expects lower one-off LTE network cost in 2H19. However, the direct expenses of Axiata are expected to rise as the second quarter period included Rm50mil in reversals.

On the Indonesian subsidiary XL, the research firm said that “it is doing well amid rational competition.”

“While competition picked-up in 3Q19, it cooled off in October, with XL on course to post FY19 core net profit of about 800 billion to 900 billion rupiah, its highest since FY13,” it said.

On the other hand, the Bangladeshi subsidiary Robi is forecast to see minimal earnings in 2H19, suppressed by the rise in turnover tax from 0.75% to 2% since April 2019.

CGS-CIMB Research believes that an initial public offering (IPO) exercise by edotco may not be on the cards so soon, although Axiata group chief executive officer has told a local financial daily that an edotco IPO may be revisited “more seriously” early next year, especially if there is a need to raise funds for a large acquisition.

The research house added that edotco has the capacity to raise Rm1.8bil to Rm2.7bil of debt, sufficient for it to acquire 4,000 to 6,000 towers.

“We believe Axiata’s 2H19 earnings are unlikely to positively surprise due to challenges in Malaysia and Bangladesh. Its FY20 enterprise value/operating free cash flow of 15.9 times is at a 10% premium over the Asean telco average. “Key upside risk is stronger-than-expected earnings improvement at Celcom, Robi and XL. Key downside risk is more intense competition in its various operating markets and regulatory risks in Bangladesh and Nepal,” it said.