- We maintain our HOLD call but raise our fair value to RM7.30/share (from RM6.80/share previously) after rolling over our valuation base to FY15F.

- Axiata reported core net profit of RM534mil for 3Q14, which brought 9M14 core earnings to RM1.8bil. This is within expectation, accounting for 72% of our estimate but below consensus at just 67% of full-year estimate.

- Group earnings fell 28% YoY (-15% QoQ), driven by weakness at Celcom and XL (see our report dated 29 Oct). Celcom saw both postpaid and prepaid subs base deteriorate with a net churn of 195K subs. Blended ARPU fell 4% both YoY and QoQ. Service revenue was flat YoY and fell 2% QoQ.

- Management is confident that 3Q14 was the bottom as it had resolved its IT issues in Oct. Celcom launched a new prepaid product in mid-Oct (after a 9-12 months lull), but the challenge now is to win back subs and dealer confidence – which involves an increase in commissions in 4Q14. Depending on the outcome, commissions might see a further increase into FY15, which could spell cost pressure in the near term.

- Also, the Malaysian telco industry is facing a contraction (-2% this year). Macro weakness (slowing consumer spend) and price competition (from MVNOs and U-Mobile in particular) are key underlying macro challenges, although the resolve of Celcom’s IT issue is an Axiata-specific positive from 4Q14.

- XL’s management is less than optimistic about the near-term outlook given competitive pressure from across the board and new entrants. That said, XL underperformed industry revenue growth as it did not raise pricing when its bigger competitors did so in 3Q14.

- Nonetheless, we raise FY14F-16F earnings by 2%-4% to reflect faster than expected integration (i.e. more resilient than expected margins at XL). However, revenue progress is slow. Redeployment of Axis’ asset is only expected within the next two quarters. It has switched off 60% of existing sites currently. Meanwhile, the bulk of cost savings (70% cost cut) has already been captured pre and immediately post consolidation.

- Group FY15 capex is likely to be flat or slightly higher. However, there is dividend risk for FY14 given earnings deterioration. Our forecast already factors in a 20% earnings growth in FY15F. The sharp rise in share price recently sufficiently captures this earnings recovery, we believe.

Source: AmeSecurities