-  We maintain our HOLD call on Axiata with a lower fair value of RM6.80/share (from RM7.00/share previously) after the release of its weaker-than-expected 2Q14 results. Axiata reported core earnings of RM630mil for its 2Q14, which brought 1H14 core earnings to RM1.2bil. This accounted for 91% of our estimate and 92% of consensus, if annualised.

-  We have cut our FY14F/15F/16F earnings by 12%/3%/2%.While we had initially indicated of EBITDA line downwards revision due to XL’s higher-than-expected depreciation and finance cost in our recent report, Celcom’s earnings apparently turned out to be disappointing.

-  What surprised us was that Celcom saw a decline in revenue (-3% YoY), EBITDA fell 10% YoY and EBITDA margin contracted 3.2ppts to 41.1% in 2Q14. Subs base saw net addition of 152K (mainly from prepaid: +162K subs QoQ, postpaid: -10K subs QoQ), but blended usage saw a 10% YoY drop (-10% QoQ). ARPUs were flat despite the 4% YoY expansion in subs base.

-  A number of factors affected Celcom. Firstly, SMS revenue fell by 27% YoY (-28% QoQ), dragged by suspension of promotion via short codes. This segment contributes to 1.5% of revenue (total SMS: 3% of revenue). This is part of an industry-MCMC collaboration to improvise services and manage content providers and it is still on-going.

-  Secondly, Celcom’s revenue (voice revenue: -4% QoQ) was dragged by an on-going IT transformation. The new system has yet to stabilise which affected:- (1) subscriber activation – dealers redirected potential subs to competitors; (2) ability to launch new plans – Celcom has not reacted at all to new plans by Maxis and Digi in 1H14; and (3) pricing system.

-  Thirdly, Celcom suffered network issues in East Malaysia and East Coast of Malaysia given a surge in data subscribers. This affected both voice and data revenues. Its network in these areas is now undergoing upgrades to accommodate higher data usage, expected to be completed by end of the quarter.

-  While the technical issues are on track to be resolved based on indication by management, regaining lost subscriber share is the next big challenge and does not guarantee immediate earnings improvement. Secondly, most issues will be resolved close to year end, meaning earnings in the next two quarters will remain depressed. Thirdly, the issues faced by Celcom is company specific– meaning there is always possibility for competitors to take full advantage of the situation, which may impact earnings trajectory and earnings trend disparity versus peers further down the road.

Source: AmeSecurities