Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD
Research House: OSK

Axiata Group Bhd
(July 30, RM4.26)
Maintain buy at RM4.31 with target price of RM4.80: Axiata's 66.5%-owned subsidiary, XL Axiata (XL), is slated to announce its 2Q10 results today. It is likely that the third-largest mobile operator in Indonesia gained additional revenue market share in the quarter at the expense of Indosat, which recently adjusted its cumulative subscriber base downwards on previously under-estimated subscriber churn. Axiata's share price has appreciated by 17% over the past three months, having outperformed the FBM KLCI by 14%.

We expect XL to deliver another stellar set of quarterly numbers due today. This comes on the heels of the better 2Q10 results reported by Dialog Axiata (86%-owned) earlier last week, which saw core earnings jump 95% quarter-on-quarter (q-o-q) against the 2% rise in revenue on further cost de-scaling efforts and its broadband business returning to positive earnings before interest, tax, depreciation and amortisation (Ebitda). We expect XL to report a 5%-6% q-o-q revenue growth (+30%-32% y-o-y), ahead of the 4% q-o-q growth (+42% y-o-y) recorded in 1Q10, driven by the continuing aggressive move to monetise traffic and generally stronger data lift. However, its Ebitda growth is likely to moderate q-o-q from the 9% growth seen in 1Q10 due to the seasonally weak advertising and promotional spending in the preceding quarter, supported by cost optimisation efforts. Both XL and Dialog make up about 45% of Axiata's group earnings and 27% of our sum of the part (SOP) target on Axiata.

Despite the intense competition in the local wireless broadband (WBB) space and the launch of the iPhone by DiGi.Com Bhd, we believe Celcom's performance held up well in 2Q10 due to the 'Blue Campaign', which was a cleverly orchestrated acquisition/retention initiative to ride on the World Cup frenzy. Celcom gave out limited edition World Cup dongles for subscribers signing up for a broadband plan and offered promotional mobile tariffs to drive usage. Celcom's mobile revenue grew 0.2% q-o-q in 1Q10, with mobile broadband revenue contributing 8% of total revenue, up from 6% in the preceding quarter. Celcom accounts for 63% of our SOP on Axiata.

We are maintaining our buy recommendation based on an unchanged SOP target of RM4.80, and would be looking to adjust our numbers post the release of its full results by end-August. Aside from the positive results news flow, other re-rating catalysts for the stock are: (i) the disclosure of a maiden dividend policy; (ii) further monetisation of non-core assets; and (ii) the opex and capex savings arising from the collaboration between Celcom Axiata and DiGi to share network infrastructure. We also maintain our buy recommendation on XL, based on a target price of IDR4,600 (RM1.63) pending the results announcement and a conference call with management. ' OSK Investment Research Sdn Bhd


This article appeared in The Edge Financial Daily, August 2, 2010.