Results Note 30 August 2021 Axiata Group OUTPERFORM ↔ Price : RM4.04 Hitting the Right Notes Target Price: RM4.45 ↔ By Lim Khai Xhiang l [email protected] Axiata’s 2QFY21 CNP of RM302m brought 1HFY21 within our Share Price Performance estimate. 2QFY21 DPS of 4.0 sen is as expected. Celcom and 4.30 most regional OpCos continued posting revenue growth driven 4.10 3.90 by subs growth. Axiata Digital Services’ losses continued to 3.70 narrow, poised to be profitable in FY22. M&A discussions in both 3.50 Malaysia and Indonesia are making good progress, and 3.30 management has hinted that they will not shy away from future 3.10 2.90 M&A opportunities to achieve scale. Post results, we maintain 2.70 our estimates, OP call and SoP-TP of RM4.45, implying 5.5x 2.50 EV/FY22 EBITDA. Jul-21 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 1HFY21 within estimates. 2QFY21 CNP of RM302m brought 1HFY21 CNP to RM521m, within our/street’s expectations at 52%/53%. 2QFY21 KLCI 1,590.16 DPS of 4.0 sen brought 1HFY21 DPS to 4.0 sen, in-line with our FY21 YTD KLCI chg -2.3% estimate of 8.0 sen. YTD stock price chg 8.0% YoY, 1HFY21 revenue rose 5% lifted by all OpCos, except (i) XL, which Stock Information suffered from stiffer competition in 1QFY21, and (ii) NCell, which suffered from churn, caused by lack of coverage and slow rollout of their network. Shariah Compliant Yes Continued cost management brought EBITDA up by 8%. All in, CNP rose Bloomberg Ticker AXIATA MK Equity by 203% on: (i) lower losses from Axiata Digital Services, (ii) lower net Market Cap (RM m) 37,057.8 finance cost, (iii) markedly lower impairment on receivables and (iv) higher Share Outstanding 9,172.7 other income. 52-week range (H) 4.23 52-week range (L) 2.66 QoQ, 2QFY21 revenue rose 5%, supported by strong revenue growth 3-mth avg daily vol: 3,252,536 across all OpCos. Note that while Celcom’s revenue fell 0.7%, its revenue Free Float 26% ex-device rose 3% on encouraging prepaid take-up. NCell continued to Beta 1.0 underperform due to the prolonged lockdowns in Nepal, exacerbating the aforementioned woes. EBITDA rose in tandem by 4%, outpaced by PBT Major Shareholders which increased 67% due to lower accelerated depreciation of 3G network KhazanahNasionalBhd 36.8% and lower forex losses on financing activities. CNP rose by 38%, buoyed Employees Provident Fund 17.0% by a lower effective tax rate (31.8% vs 1QFY21: 48.2%) Skim AmanahSaham 14.7% Outlook. Despite the prolonged delay in economic recovery in the regional markets, we think the OpCos have hit a sweet spot in acquiring and Summary Earnings Table* retaining subs, and thus will continue to post growth in the coming quarters. FYE Dec (RMm) 2020A 2021E 2022E We think that Axiata Digital Services (ADS) will continue to post strong Revenue 24,203 25,144 26,221 revenue growth driven by: (i) recovery in merchant transactions, (ii) higher EBITDA 10,657 11,566 12,062 digital marketing spend, and (iii) continued growth in users. At the current EBIT 2,495 3,269 3,671 rate of margin improvement, ADS should be profitable by FY22. We gather PBT 1,171 1,869 2,271 that the Celcom Digi merger is progressing well, as engagements with PATAMI 624 1,383 1,681 MCMC have been smooth and there is enthusiasm between both telcos to Core PATAMI 865 996 1,176 merge. On XL’s proposed acquisition of Link Net, management indicated Consensus (NP) N.M. 988 1,254 that the funding could be from either XL or Axiata. Management has also Earnings Revision N.M. N.A. N.A. hinted that they will not shy away from more M&A deals, even if it’s Core EPS (sen) 9.4 10.9 12.8 earnings dilutive in the near-term, as they look to achieve scale across their Core EPS growth (%) -10 15 18 operating markets. While we do not anticipate any new deals in the near- NDPS (sen) 7.0 8.0 10.0 term, as the focus is currently on Celcom’s and XL’s deals, we would not BVPS (RM) 1.9 2.0 2.0 be surprised of future mobile and/or fixed deals in its other operating PER (x) 42.3 36.7 31.1 markets. PBV (x) 2.1 2.0 2.0 Post results, we maintain our FY21 and FY22 estimates. Net Gearing (x) 0.8 0.8 0.8 Net Div. Yield (%) 1.8 2.0 2.5 Maintain OUTPERFORM on unchanged SoP-driven TP of RM4.45. Our TP implies EV/FY22 EBITDA of 5.5x, close to its 3-year mean. All in, we think *Estimates are based on pre- the market will continue to favour Axiata for: (i) its exposure to the regional Celcom Digi merger Axiata economic recovery, (ii) continued growth and improving profitability at ADS, (iii) edotco’s growth prospects from more 5G sites. PP7004/02/2013(031762) Page 1 of 5 Axiata Group Results Note 30 August 2021 Celcom seems to have found its footing in the prepaid market, as it posts its 5th consecutive quarter of prepaid subs growth, which we suspect is at the expense of DIGI, which has posted four consecutive quarters of prepaid subs decline (albeit partially driven by loss of migrant subs), and other MNOs/MVNOs. We believe its MVNO strategy and digital channels are allowing Celcom to target young subscribers. Risks to our call include: (i) weaker-than-expected performance at Celcom and regional OpCos, (ii) poorer-than-expected costs management, and (iii) Celcom and Digi merger discussions falling through. Malaysia Big-3 Prepaid Market Share and Subscribers Prepaid (Big-3) Market Share Big-3 Prepaid Subscribers ('000) 100% 12,000 90% 11,000 80% 10,000 70% 60% 9,000 50% 8,000 40% 7,000 30% 6,000 20% 10% 5,000 0% 4,000 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 Maxis Digi Celcom Celcom Digi Maxis Source: Kenanga Research Results Highlight 2Q 1Q QoQ 2Q YoY 1H 1H YoY FYE Dec (RM m) FY21 FY21 Chg FY20 Chg FY21 FY20 Chg Revenue 6,390 6,064 5.4% 5,792 10.3% 12,454 11,829 5.3% EBITDA 2,811 2,692 4.4% 2,584 8.8% 5,503 5,088 8.2% PBT 605 362 67.0% 388 55.9% 967 981 -1.4% Taxation -190 -175 8.7% -231 -18.0% -364 -426 -14.4% Minority Interest -137 -112 22.6% -76 79.3% -249 -287 -13.2% PATAMI 278 76 267.6% 80 247.1% 353 268 31.8% Core PATAMI 302 218 38.4% 47 537.4% 521 172 202.5% Core EPS (sen) 3.3 2.4 38.4% 0.5 537.4% 5.7 1.9 202.5% DPS (sen) 4.0 0.0 2.0 4.0 2.0 EBITDA Margin 44.0% 44.4% 44.6% 44.2% 43.0% PBT Margin 9.5% 6.0% 6.7% 7.8% 8.3% CNP Margin 4.7% 3.6% 0.8% 4.2% 1.5% Source: Company, Kenanga Research Revenue Breakdown 2Q 1Q QoQ 2Q YoY 1H 1H YoY FYE Dec (RM m) FY21 FY21 Chg FY20 Chg FY21 FY20 Chg Celcom 1,624 1,636 -0.7% 1,437 13.1% 3,261 2,975 9.6% XL (Indonesia) 1,926 1,790 7.6% 1,886 2.1% 3,715 3,764 -1.3% Robi (Bangladesh) 951 943 0.9% 896 6.2% 1,894 1,848 2.4% Dialog (Sri Lanka) 711 678 4.9% 657 8.3% 1,389 1,308 6.2% Ncell (Nepal) 345 377 -8.5% 315 9.5% 723 758 -4.7% Smart (Cambodia) 338 337 0.3% 310 9.0% 676 628 7.6% Edotco 187 187 0.1% 182 2.5% 374 363 3.0% Others & eliminations 307 116 164.6% 109 181.1% 423 185 129.0% Total Revenue 6,390 6,064 5.4% 5,792 10.3% 12,454 11,829 5.3% % Contribution Celcom 26.8% 26.1% 23.8% 53.8% 49.3% XL (Indonesia) 31.8% 28.6% 31.2% 61.3% 62.4% Robi (Bangladesh) 15.7% 15.1% 14.8% 31.2% 30.6% Dialog (Sri Lanka) 11.7% 10.8% 10.9% 22.9% 21.7% Ncell (Nepal) 5.7% 6.0% 5.2% 11.9% 12.6% Smart (Cambodia) 5.6% 5.4% 5.1% 11.1% 10.4% Edotco 3.1% 3.0% 3.0% 6.2% 6.0% Others & eliminations 5.1% 1.9% 1.8% 7.0% 3.1% Source: Company, Kenanga Research PP7004/02/2013(031762) Page 2 of 5 Axiata Group Results Note 30 August 2021 EBITDA Breakdown 2Q 1Q QoQ 2Q YoY 1H 1H YoY FYE Dec (RM m) FY21 FY21 Chg FY20 Chg FY21 FY20 Chg Celcom 678 646 4.9% 571 18.6% 1,324 1,085 22.0% XL (Indonesia) 972 901 7.9% 968 0.5% 1,873 1,900 -1.4% Robi (Bangladesh) 411 385 6.8% 443 -7.3% 796 827 -3.7% Dialog (Sri Lanka) 295 285 3.7% 245 20.5% 580 523 10.8% Ncell (Nepal) 204 224 -9.1% 154 32.5% 428 415 3.1% Smart (Cambodia) 190 181 4.6% 185 2.7% 371 367 1.0% Edotco 316 303 4.2% 303 4.4% 619 577 7.3% Others & eliminations -255 -233 9.2% -285 -10.6% -488 -607 -19.6% Total EBITDA 2,811 2,692 4.4% 2,584 8.8% 5,503 5,088 8.2% EBITDA Margin Celcom 41.7% 39.5% 39.8% 40.6% 36.5% XL (Indonesia) 50.5% 50.3% 51.3% 50.4% 50.5% Robi (Bangladesh) 43.2% 40.8% 49.5% 42.0% 44.7% Dialog (Sri Lanka) 41.5% 42.0% 37.4% 41.8% 40.0% Ncell (Nepal) 59.0% 59.4% 48.8% 59.2% 54.7% Smart (Cambodia) 56.0% 53.7% 59.5% 54.9% 58.5% Edotco 169.0% 162.2% 165.8% 165.6% 159.0% Others & eliminations -83.0% -201.1% -260.9% -115.4% -328.7% Total 44.0% 44.4% 44.6% 44.2% 43.0% % Contribution Celcom 25.2% 23.7% 22.8% 49.2% 43.3% XL (Indonesia) 36.1% 33.0% 38.6% 69.6% 75.9% Robi (Bangladesh) 15.3% 14.1% 17.7% 29.6% 33.0% Dialog (Sri Lanka) 11.0% 10.4% 9.8% 21.6% 20.9% Ncell (Nepal) 7.6% 8.2% 6.1% 15.9% 16.6% Smart (Cambodia) 7.0% 6.6% 7.4% 13.8% 14.7% Edotco 11.7% 11.1% 12.1% 23.0% 23.1% Source: Company, Kenanga Research Celcom Key Operating Indicators 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 Postpaid ARPU (RM/mth) 86 88 85 84 84 84 83 83 Prepaid ARPU (RM/mth) 36 36 32 30 32 30 30 30 Blended ARPU (RM/mth) 52 53 49 47 48 46 45 45 Postpaid Subs ('000) 2,979 2,964 2,942 2,928 2,960 3,035 3,062 3,106 Prepaid Subs ('000) 5,644 5,408 5,040 5,100 5,439 5,642 5,933 6,117 Total Subs ('000) 8,623 8,372 7,982 8,027 8,400 8,678 8,994 9,223 Source: Company, Kenanga Research AXIATA Sum-of-Parts Valuation Valuation Enterprise Value Axiata’s Stake Value to Companies Earnings Multiple Method (RM’ m) (%) Axiata(RM’ m) Celcom Digi (Malaysia) EV / EBITDA 10.5x 62,883 33.1% 20,814 XL (Indonesia) DCF WACC: 9.5%, TG: 2.0% 19,226 66.4% 12,766 Robi (Bangladesh) EV / EBITDA 7.7x 12,898 61.9% 7,984 Dialog (Sri Lanka) EV / EBITDA 3.0x 3,682 83.3% 3,067 Ncell (Nepal) EV / EBITDA 5.0x 4,606 80.0% 3,685 Smart (Cambodia) EV / EBITDA 6.0x 5,355 72.5% 3,882 Axiata Digital Services EV / Sales 3.5x 2,441 100.0% 2,441 edotco EV / EBITDA 9.0x 12,583 63.0% 7,927 Total Enterprise Value 62,567 (-) FY22E Net Debt and Minority Interest 21,971 Total Equity Value 40,596 Fair Value/Share (RM) 4.45 Source: Kenanga Research PP7004/02/2013(031762) Page 3 of 5 Axiata Group Results Note 30 August 2021 Peer Table Comparison Core Earnings ROE Net DivYld Name Revenue Growth PER (x) - Core Earnings PBV (x) Target Last Price Market Cap Shariah Current Growth (%) (%) Price Rating (RM) (RM'm) Compliant FYE 1-Yr.