Axiata Group - Dividend surprise, positioned for acquisitive growth BUY

• We maintain our BUY rating on Axiata with a lower fair value of RM5.90/share (vs. RM6.08/share previously) following the announcement of its 4Q11 results yesterday. Axiata remains our top pick in the sector.

• The group reported a core net profit of RM585mil for its 4Q11, which brought FY11 core net earnings to RM2.5bil. This was short of our expectation but within consensus, accounting for 90% and 97% of full-year estimates, respectively. Given weaker than expected results, we trim our FY12-13F earnings by 5%-7% to reflect lower margin expectations going forward.

• EBITDA rose 1% YoY on the back of a 5% revenue growth. On constant currency, EBITDA would have grown by 3% and revenue by 7.5%. Normalised net profit grew 2% YoY. Celcom registered a 2% YoY EBITDA growth on the back of a 6% revenue growth. 

• Earnings asides, dividends surprised on the upside. Axiata announced a final dividend of 15 sen/share, which brought full-year dividends to 19 sen/share (net dividend yield of 3.7%). This is effectively 90% higher than last year’s dividend and represents almost a doubling in payout ratio to 60% from 35% previously. Management guides for ahigher 2012 payout of 65%, which translates into a  net dividend yield of 4.4%. 

• 2011 was a washout year, dragged by stiff competition and unfavourable forex movements. However, an underutilised balance sheet (0.2x net gearing, which in fact, is one of the lowest among regional telcos) positions Axiata well to capture acquisitive growth opportunities (See Table 1). We estimate that the group can comfortably gear up to RM6bil to fund any potential M&A. Any capital raising exercise in the near-term should serve to vindicate our thesis.

• On top of this, Axiata entails the best potential for upside dividend surprise in our opinion – there is abundant room to capitalise on retained earnings (relative to Maxis/DiGi) and cash to pay out dividends given low net debt/EBITDA of 0.5x, gross cash of RM6bil and FCF of close to RM2bil.

• Telco stocks have performed well over the past 12 months and yields have compressed significantly. However, we believe telcos should remain attractive given relative earnings stability. We like Axiata best in the sector given:-

(1) Axiata is a laggard– valuation at over 30% discount to sector EV/EBITDA of 9x, partly given that it was not as committed to dividend payouts as local telco peers previously; (2) Best potential for upside dividend surprise. 

Source: Amesecurities