Axiata Group - Dividend surprise, positioned for acquisitive growth BUY

Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD

Research House: AMMB

Price Call: BUY

Target Price: 5.90

' We maintain our BUY rating on Axiata with a lower fair valueof RM5.90/share (vs. RM6.08/share previously) following the announcement of its4Q11 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 ourexpectation but within consensus, accounting for 90% and 97% of full-yearestimates, respectively. Given weaker than expected results, we trim ourFY12-13F earnings by 5%-7% to reflect lower margin expectations going forward.

' EBITDA rose 1% YoY on the back of a 5% revenue growth. Onconstant 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 onthe back of a 6% revenue growth. 

' Earnings asides, dividends surprised on the upside. Axiataannounced a final dividend of 15 sen/share, which brought full-year dividendsto 19 sen/share (net dividend yield of 3.7%). This is effectively 90% higherthan last year's dividend and represents almost a doubling in payout ratio to60% from 35% previously. Management guides for ahigher 2012 payout of 65%,which translates into a  net dividendyield of 4.4%. 

' 2011 was a washout year, dragged by stiff competition and unfavourableforex movements. However, an underutilised balance sheet (0.2x net gearing,which in fact, is one of the lowest among regional telcos) positions Axiatawell to capture acquisitive growth opportunities (See Table 1). We estimatethat 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 ourthesis.

' On top of this, Axiata entails the best potential forupside dividend surprise in our opinion ' there is abundant room to capitaliseon retained earnings (relative to Maxis/DiGi) and cash to pay out dividendsgiven low net debt/EBITDA of 0.5x, gross cash of RM6bil and FCF of close toRM2bil.

' Telco stocks have performed well over the past 12 months andyields have compressed significantly. However, we believe telcos should remainattractive given relative earnings stability. We like Axiata best in the sectorgiven:-

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

Source: Amesecurities