Frontier market risk
FY22-23 earnings could potentially come under pressure with the LKR
devaluation, and the initial dilution upon completion of the Philippines
towers acquisition. Nevertheless, the longer-term growth thesis remains
intact with management still striving to deliver a 20sen DPS in 2024.
Maintain BUY with a lower MYR4.50 TP (-4%, SOP-based).
Dialog’s contribution under pressure
The Sri Lanka rupee (LKR) has depreciated significantly YTD (40% relative
to USD and 37% relative to MYR) due to the country depleting its forex
reserves. Our checks point to revenue trends still holding. The main
impact to Axiata for now would be lower MYR contribution from Dialog
(more pronounced in 2Q22 with the LKR weakening from Mar 22). The
consequent import curbs in Sri Lanka have resulted in fuel shortages and
electricity cuts, both of which are vital to the running of telecom
networks. Sri Lanka is currently applying for IMF aid.
Philippines towers earnings-dilutive initially
The transaction would be financed by edotco (initially by debt), and does
not require Axiata shareholders approval. Axiata’s pro-forma disclosures
suggest a more palatable transaction multiple of c.15x EV/EBITDA. This
would still imply an earnings dilution in the initial years (we estimate
c.MYR100m net profit hit to Axiata in Year 1), with management
conservatively budgeting for PAT-neutrality in Year 5. Axiata expects to
complete the acquisition by Dec 2022.
Cutting earnings for now
We lower our FY22/23/24 net profit forecasts by 7% each to reflect lower
Dialog contributions from a weaker LKR. Our TP (derived from a sum-ofparts with each op-co valued on DCF) is consequently lowered to
MYR4.50 (-4%). We have yet to incorporate the effects of the Linknet
(likely earnings-accretive to Axiata) and Philippines towers acquisitions
as both are still pending completion.