- We reaffirm our BUY rating on Axiata at unchanged fair value of RM7.80/share. Axiata reported core net profit of RM556mil for its 1Q15. This is at the higher end of our estimate, accounting for 25% of our FY15F earnings, and within consensus at 22%.

- Earnings were down 11% YoY, although this was largely expected given the drag from XL and Celcom. Other units reported strong growth – i.e. Dialog and Smart saw +56% and +72% earnings growth driven by cost efficiencies and strong subscriber growth. Axiata’s weak 1Q15 earnings were largely expected and the fact that Axiata accounted for 25% of our earnings suggests potential upside if recovery indeed materialises in 2H15 as guided.

- Celcom: Reported an 11% YoY fall in earnings. Celcom’s 1Q15 was still partly impacted by its IT system stabilisation, on top of the East Coast floods which saw >400 dealer sites affected. The East Coast accounts for circa 16% of Celcom’s revenue.

- Subscriber base saw a deeper net churn of 688K (coming mainly from the prepaid segment) but 1Q15 should mark bottom. ARPU were stable at RM46/subs supported by much stronger data revenue growth but EBITDA margins were impacted by higher device sales in the quarter.

- Having been absent from the market for >1 year and having passed its IT system stabilisation phase, Celcom is now focusing on revitalising trade channels, moving to non-traditional trade channels, and optimising product offerings. More importantly, it is now in a position to launch more tactical bundles to arrest the decline in subscriber share (which now stands at 33% from 36% a year ago).

- XL: Slipped into a net loss in 1Q15, but again, this was largely expected given the execution of XL’s new strategy to focus on higher value subscribers, which will translate into a temporary phase of huge net churn till end-2Q15. Margins were impacted by lower tower revenue and higher tower lease cost after the sale of 3.5K towers in 4Q14, of which proceeds were used to pare down XL’s debt. Post 1H15 however, the painful exercise should translate into lower subscriber acquisition cost, improved ARPUs and an improvement in subs addition trends.

- All in, Axiata’s 1Q15 was poor but not unanticipated. At 9x FY15F EV/EBITDA (relative to celco peers’ valuation of 14x) and given the fact that the 1Q15 met expectations, we think the weakness in 1H15 earnings is more than reflected in Axiata’s current valuations.

Source: AmeSecurities Research - 20 May 2015