Axiata: Earning Rebounded

Background

Axiata Group Berhad (“Axiata”) provides various telecommunications products and services in Asia. It has controlling interests in six mobile operators under the brand names of ‘Celcom’ in Malaysia, ‘XL’ in Indonesia, ‘Dialog’ in Sri Lanka, ‘Robi’ in Bangladesh, ‘Smart’ in Cambodia and ‘Ncell’ in Nepal, with strategic interests in ‘Idea’ in India and ‘M1’ in Singapore. The Group has an infrastructure company, ‘edotco’, which operates in five countries to deliver telecommunications infrastructure services, and operates and manages a regional portfolio of over 25,000 towers. For more information on the group, go here.  

Historical Financial Performance

Axiata’s top-line has been on a steady uptrend over the past 10 years. However its bottom-line suffered a decline in the past 5 quarters, with net profit below RM400 million from QE31/3/2016 to QE31/3/2017. It even incurred a net loss of RM309 million in QE31/12/2016. The reasons for the decline in profit (and loss) for these 5 quarters are:

• amortisation of intangibles assets arising from acquisition of Nepal operation
• accelerated depreciation in Indonesia & Bangadesh
• foreign exchange losses
• higher net finance costs

In QE30/6/2017, Axiata net profit climbed back above the RM400 million. This may mark the beginning of its earning recovery.

Graph: Axiata’s last 42 quarters revenue & profits

Recent Financial Result

Axiata announced its latest quarterly result for QE30/6/2017 last week. Its net profit rose 70% q-o-q or 116% y-o-y to RM407 million while revenue rose 3% q-o-q or 14% y-o-y to RM6.06 billion. The q-o-q improvement in profit was due to improved performance in all major operating companies with the exception of the Cambodian operation. Improved revenue and effective cost management resulted in EBITDA growth by 5.6%. For the quarter, share of results from associates and joint ventures declined by more than 100% mainly as a result of the investment in India. India continues to face intense market aggression arising from the new entrant in the Indian market. PAT improved by 82.8% and PATAMI increased by 70.4% to RM407.2 million contributed mainly by the improved quarter performance by all major operations.

Table: Axiata’s last 8 quarters’ P&L

Latest Financial Position

Axiata’s financial position is relatively weak as at 30/6/2017, with current ratio at 0.66x and total liabilities to total equity at 1.25x. The weak financial position - due to over-expansion - need to be rectified by either capital-raising or partial disposal of its stakes in some of the operating units (such as its tower asset company).

Valuation

Axiata (closed at RM4.93 on August 30, 2017) is now trading at a trailing PER of 75x (based on last 4 quarters’ EPS of 6.6 sen). At this PER, the stock is over-valued. However Axiata may be on the path of recovery. If its net profit can climb back to RM600 million a quarter, its full-year EPS would be about 28 sen - bringing down its PER to 18x. At a PER of less than 20x, Axiata will again be an attractive telco stock.

Technical Outlook

Axiata broke its long-term uptrend in 2015 when its share price went below its 30-month EMA line. Since then, Axiata has been on a downtrend.  

Chart 1: Axiata’s monthly chart as at August 30, 2017 (Source: Shareinvestor.com)

If Axiata can surpass the intermediate downtrend line, RR at RM5.30, the share price recovery may begin.

Chart 2: Axiata’s weekly chart as at August 30, 2017 (Source: Malaysiastock.biz)

Conclusion

Axiata could be a good stock for a recovery play based on tentative sign of earning recovery. It is a home-grown multi-national company with good management, steady revenue growth and, until recently, long track record for profitable operation. However the stock is not cheap as its earning had declined sharply over the past 5 quarters. With earning recovery beckons, Axiata could be a good stock to consider for long-term investment. 

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.