• 4Q18 EBITDA declined 4.0% qoq and 10.4% mainly on Celcom’s free smartphone campaign.
• 2018 EBITDA fell 9.7% on forex translation and MFRS 15 impact despite strong underlying performance at XL, Dialog, Robi, and edotco; it was inline with our estimates at 98%.
• After the kitchen sinking exercise, we expect profits to improve on lower D&A costs and management commitment to focus on profit growth instead of revenue.
• However, we are cautious over increasing regulatory risk in emerging market amidst the CGT issue in Nepal. Downgrade to HOLD (from Buy) with lower TP of RM4.25.

Intense competition in smartphone bundling plan

4Q18 EBITDA declined 4.0% and 10.4% for qoq and yoy respectivelydue largely to Celcom’s free smartphone campaign that concentrated on flagships released over 2H 2018. Nevertheless, it drove up blended ARPU to RM52 (3Q18: RM49) due to higher minimum subscription plan (ie. RM80/month) to qualify for these devices. We expect similar impact to Celcom’s 1Q19 performance amidst its on-going Guna Celcomtm campaign.

Forex translation and MFRS15 offset FY18 EBITDA growth

FY18 EBITDA slipped 9.7% and came broadly in-line with our estimates at 98%. This was due to forex translation loss and MFRS 15 adoption. On constant currency basis (Table 3), Robi and Dialog saw significant EBITDA growth of 26.9% and 28.4% respectively, while XL and edotco posted moderate growths.

Setting a clean slate for 2019

2018 earnings were distorted by accelerated depreciation on 2G networks worth RM1.8bn and losses on Idea's dilution of RM3.7bn as well as impact from the MFRS 15 adoption. After the kitchen-sinking exercise, we expect its bottomline to improve on lower depreciation and amortisation cost going forward. Its 2019F KPI is EBITDA growth of 5-8% driven by cost optimisation and profit prioritisation instead of revenue growth. Hence, we raised our earnings forecasts by 7.9% and 0.2% for FY19 and FY20 respectively (Table 5).

Downgrade to HOLD with lower TP of RM4.25

While growth prospects via emerging markets is compelling, we are concerned over heightened regulatory risks in some of these markets. The recent RM2.2bn CGT charges by the Nepal government triggered us to lower our valuation by drawing on the full impact into NCell’s cash flow. Downgrade to HOLD (from Buy) with a lower SOP-derived TP of RM4.25 (from RM4.60).

Source: BIMB Securities Research - 25 Feb 2019