Axiata Group - Dividend surprise underpinned, robust growth despite increased competition Buy

- We re-affirm our BUY rating on Axiata, with an unchanged FV of RM6.70/share following the release of its 2Q12 results last Thursday. 

- Axiata reported core earnings of RM717mil for 2Q12,bringing 1H12 core earnings to RM1.4bil. This is within expectations accounting for 48% of our FY12 projection and 52% of consensus. Normalised 1H12 EBITDA of RM3.7bil accounted for 51% of our forecast and 49% of consensus.

- Despite higher competition (following Maxis’ and DiGi’s aggressive price discounting in 2Q12), Axiata’s EBITDA margin strengthened to 44% in 2Q12 vs. 41% (1Q12) –Axiata is not a major player in the low-end foreign worker segment where competition is heating up. The margin expansion, on top of a 4% QoQ revenue growth led earnings higher by 4% QoQ. On YoY basis, margins were slightly weaker by -0.8ppt given increased contribution of data, but this was more than offset by a 9% YoY revenue growth, which led to a net 8% earnings growth in 2Q12. 

- Celcom in particular (which accounts for 64% of SOP and 43% of group EBITDA) saw revenue growing by 9% YoY.  EBITDA rose 6% YoY – margins were slightly diluted by higher data contribution (2Q11: 45.6%, 2Q12: 45.2%). ARPUs remained steady QoQ while MoUs increased 7-8%QoQ for postpaid and prepaid (See Chart 1). Management sees room for further improvement in voice as it rolls out new products in 2H12. 

- XL (which accounts for 45% of EBITDA, 17% of SOP) saw topline growth of 16% YoY (a significant re-acceleration vs. +7% YoY in 1Q12), driven by strong data revenue growth (+68% YoY) – data users increased 65% YoY. Despite EBITDA margin contracting to 47.7% in 2Q12 (1Q12: 48.3%, 2Q11: 52%) EBITDA still managed a growth of 6% both on a YoY and QoQ basis. The results underpin Axiata’s positioning as a proxy to robust data growth in Indonesia via its 66% stake in XL. 

- Axiata announced interim dividends were doubled YoY at 8sen/share (vs. 4sen/share 2Q11). This underpins our view of a potential dividend surprise at Axiata. Management indicated that it is possible to go beyond its 65% payout ratio ceiling if FCF and capex plans permit it to do so.  

- Axiata is still the cheapest local telco trading at 7x FY13F EV/EBITDA vs. Maxis and DiGi’s 11x-12x. The recent balance sheet optimisation exercise and followed by increased dividend payout in 2Q12 are strong share price catalysts. M&A possibilities in the near term (utilising a ready credit line of US$1.5bil) are another strong catalysts further out.

Source: AmeSecurities