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Wednesday, December 07, 2016

Axiata: Coping With Labour Pain?

Result Update

For QE30/9/2016, Axiata's net profit rose 36% q-o-q but dropped 71% y-o-y to RM257 million while revenue rose 3% q-o-q or 8% y-o-y to RM5.46 billion.


Table 1: Axiata's last 8 quarters' P&L

If you looked at the profits of Axiata, you will see 2 trends; firstly, Axiata has taken quite a beating over the past 3 quarters, only to stabilize in QE30/9/2016. The improved q-o-q result was attributed to "steady operational performance, particularly from the Group’s South Asia Operating Companies (OpCos) namely Ncell1, Dialog and Robi" plus "lower Depreciation and Amortisation (D&A) and net finance cost, as well as lower forex losses".


Graph 1: Axiata's last 39 quarters' P&L

The second trend is that its profits have been flattish for a long period (FY2011-2014) despite rising Operating Revenue. This is due to 3 rising expense items, namely Depreciation, Impairment & Staff Costs; and Other Costs. These 3 rising items have more than offset the decline in Domestic Inconnect & International Overpayment- leading to a stagnant bottom-line. (See the table & graph below, which show 5 years' of the first 9 months results.) In my opinion, the reason for these rising expenses is due to the expansion in some of the developing markets that Axiata group is operating in. When these operations reached their critical mass, the profit should begin to roll in. This is a case of labour pain- pain today and joy tomorrow!
 

Table 2: Axiata's last 5 years' first 9 months' P&L
 

Graph 2: Axiata's last 5 years' first 9 quarters' P&L

Valuation

Axiata (closed at RM4.30 yesterday) is now trading at a PER of 30x (based on last 4 quarters' adjusted EPS of 14.50 sen). This makes Axiata less attractive compared to MAxis or Digi which have a PER of about 22-23x. But things may change...
   
Technical Outlook

Axiata is deeply oversold, with potential relief rally insight. In fact, its MACD has crossed above its MACD signal line- thus predicting a possible rebound. This rebound will face immediate resistance at the horizontal line at RM4.50 and beyond that at the next horizontal line at RM5.00. If the relief rally fizzled out, it may retest its recent low. If the test of the low is successful, we may then see a recovery for this stock.


Chart 1 Axiata's daily chart as at Dec 7, 2016_10.45 (Source: ShareInvestor)


Chart 2: Axiata's weekly chart as at Dec 7, 2016_10.45 (Source: ShareInvestor)
 

Chart 3 Axiata's monthly chart as at Dec 7, 2016_10.45 (Source: ShareInvestor)
 
Conclusion

Based on technical consideration, Axiata could be a good stock to consider for a recovery play. However, it should be noted that its valuation is not attractive as its earning has buffeted by rising costs in growing its many operating units. There is only tentative signs of a bottom - no sign of recovery yet - thus warranting only a very small exposure at best to this stock. Good luck!

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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