- We maintain our BUY call on Axiata at an unchanged fair value of RM7.90/share after attending a meeting with Axiata/Celcom/XL’s key management earlier this week. With a new management team in place and having completed the integration with Axis, XL is now shifting its focus on profitability (vs. volume and subscriber growth previously). The 3-phase strategy from FY15F-17F (and beyond) involves product revamps and re-pricing, realignment of sales channels and a dual brand strategy, among others.

- Starter pack discounts are being rolled back while rates are likely to be adjusted upwards. The weeding out of low value subscribers in the process however, will have a short-term revenue impact in 1H15 before recovering in 2H15. Previous revenue guidance could be revised lower but this is a one-off impact for a structurally improved business model focusing on higher ARPU subscribers and lower subscriber acquisition cost in the mid-to-long term.

- Industry environment is conducive to accommodate this change – key incumbents have been successful in driving up rates in the past year, while industry consolidation driven by XL could have played a part in the more favourable pricing environment. More importantly, XL is not in isolation in driving this shift in focus from volume to value.

- Management is attempting to position the XL brand in the mid-to-high end market while retaining the Axis brand for the lower segment. Axis is better positioned to deal with irrationalities in the industry without excessively affecting XL’s value proposition. The repositioning of the XL brand to manage changes in the industry’s competitive climate in the past was costly and took considerable time to take effect.

- The silver lining from the exit of low yielding subscribers is the freeing up of valuable capacity – XL’s 3G network utilisation could fall below 50% – which means previously planned capex of IDR7tril for FY15F could also be brought substantially lower.

- In Malaysia, Celcom should soon be ready to launch tactical offerings after having been absent for over a year. Focus now is on ground execution: (1) ensuring the Celcom brand is regaining visibility in the trade after a long absence; and (2) exploring new distribution channels such as online platforms, convenience stores, and petrol stations.

- Despite the brief restructuring impact at XL, Axiata is broadly on the verge of earnings recovery. Share price has underperformed in the past 12 months; its valuations are most compelling among celcos and is best positioned for a dividend surprise (low net debt to EBITDA of 1.5x and capex revision at XL).

Source: AmeSecurities