- We re-initiate our coverage of Axiata Group with a BUY call with a sum-of-parts (SOP)-based fair value of RM7.60/share, which implies a FY16F EV/EBITDA of 8x- 40% below Singapore Telecommunications Ltd’s present 14x.

- Valuations are currently attractive due to improving operational numbers for Celcom and XL, which are beginning to show traction. Celcom, which accounts for 68% of our SOP, has taken away a slice from the other two main celcos’ market share.

- Celcom has continued to increase its market share by adding 169,000 new subscribers in 3QFY15 vs. 61,000 in 2QFY15, mostly from the prepaid segment due to promotional packages launched in June this year.

- As a comparison, Maxis and Digi lost 168,000 and 140,000 net subscribers respectively during the same quarter. Amongst the three main celco players, we estimate that Celcom’s subscriber market share rose to 33.5% in 3QFY15 from 32.9% in 1QFY15.

- The transformation progress for XL Axiata has shown encouraging signs, on subscriber mix improvement, with 3QFY15 ARPU rising 19% QoQ and 41% YoY to IDR38,000/month, which drove revenues up 4% QoQ.

- For Dialog, Robi and Smart, subscriber base growth is encouraging, driven by stronger data adoption. Despite regulatory risks in Sri Lanka and Bangladesh, we view that management has proactively engaged with the relevant authorities to mitigate any adverse impact to the sector and consumers.

- For FY16F-FY17F, we are projecting Axiata’s earnings growth to recover by 10% annually, mostly driven by Celcom’s recovery on accretive net subscriber increase, coupled with XL’s turnaround on improving subscriber mix and robust subscriber growth from Sri Lanka, Bangladesh and Cambodia.

- Nevertheless, we acknowledge that Axiata’s 9MFY15 results came in below expectations, as normalised net profit accounted for 70% of the FY15F street estimate of RM2,376mil. As a comparison, 9MFY14 accounted for 77% of FY14 net profit.

- The results generally came in weaker than expected due to lower than expected revenue growth being more than offset by higher depreciation and interest charges. Hence, 3QFY15 revenue rose 8% to RM5.1bil but normalised net profit declined by 12% to RM516mil.

- The stock currently trades at a bargain FY16F EV/EBITDA of 6.6x, below its 2-year average of 8.6x. Additionally, dividend yields are attractive at 3%-4%.

Source: AmeSecurities Research - 30 Nov 2015