- We raise Axiata to BUY from HOLD and increase our fair value to RM7.90/share from RM7.60/share. Axiata reported core net profit of RM461mil for its 4Q14, which brought FY14 core earnings to RM2.2bil. This is below expectations – accounting for 85% of our and 90% of consensus estimate. We adjust our earnings down by 9%/8% for FY15F/16F to reflect the weaker-than-expected results – deviation came mainly from Celcom and XL’s topline.

- Exceptionally high tax rate dragged 4Q14 bottomline. EBITDA and normalised pretax profit were up 7% and 6% QoQ on the back of a 3% increase in revenue. Beyond the weaker-than-expected FY14 (which was a washout year for Axiata anyway), 4Q14 showed improvements in profitability and operational traction which strongly point to an inflection in earnings this year. Management is guiding for 4% growth in FY15F revenue and EBITDA.

- Several positives in the quarter: (1) Margins returned to 40% levels (driven by recovery at Celcom and XL); (2) Celcom blended ARPU is stabilising albeit subs traction is still lacking – two new products were launched late in 4Q14; (3) Maiden quarter that service revenue turned in positive growth since IT and network issues impacted Celcom; and (4) Voice, VAS and data showed sequential uptick of 1%, 4% and 10%, respectively.

- After falling behind competitors in network expansion in FY14 (resulting in market share loss), XL can now re-accelerate expansion after having fully completed its integration with Axis. Management is guiding for mid-to-high single digit revenue growth for XL (the highest among its opCos). Re-deployment of Axis’ equipment/infra and incremental spectrum should allow XL to realise capex efficiency from FY15F.

- More importantly, Axiata is getting more aggressive in capitalising on the data/smartphone conversion wave over the next 12 months. Reflecting this, capex guidance surprised on the upside – Axiata is guiding for group capex to increase to RM4.8bil from RM4.4bil (with the increase allocated to Celcom, XL, Robi, and Dialog mainly).

- Having undergone the IT transformation exercise (80%- 90% completed), Celcom is better positioned to:- (1) shorten time to market from multiple weeks to circa 30 days; (2) shorten transaction time e.g. just 30 seconds to complete an activation; and (3) integrate CRM across different services.

- Beyond fundamental earnings improvement, Axiata is perhaps best positioned (net debt to EBITDA of just 1.25x vs. ceiling of 2.5x, RM1bil gross cash at holdings level) to churn out surprise dividends to meet demands for incremental cash upflow to the government (via Khazanah), if required.

Source: AmeSecurities