Highlights

Revenue growth were mainly contributed by non-core mobile services (XL’s interconnect, device sales and Celcom’s USP) while expansion from VAS and data were slightly more than the contraction in voice and SMS.

U Mobile’s domestic roaming revenue loss of RM50m per quarter was in line with our estimate (refer to “Much Anticipated Disengagement” dated 26th Mar 2012) and is a big impact as it flows directly through to Celcom’s profitability with negligible OPEX (~10% of FY12 PAT).

Market inelasticity due to maturity is observed in Malaysia and Indonesia as lower pricing (ARPU) did not result in higher usage (MOU).

Stagnation in Celcom’s advance data (excluding SMS) as contributions towards overall sales fell qoq albeit marginally to 24% while Maxis and DiGi’s improved 0.6-ppt and 1.8-ppt respectively. Small and mid-screen subs are more profitable yielding EBITDA margin of 33%-36% compared to large screen users who are only contributing 15%-18%. Plans to stretch data margin to 45% through pricing rejig and migrate dongle users to small and mid-screens.

Celcom plans to introduce FTTH products by early July and gradually rollout LTE on 1.8GHz and 2.6GHz spectrums with a target of 1,200 sites by 2Q14 covering 60% population while overcoming regulatory resistance in site acquisition.

Continuous pressure in SMS amid new interconnection rate and OTT substitution spurred by smartphone proliferation impacting XL and Celcom respectively.

Even with the successful bid of extra 5MHz block in Feb bringing the total to 15MHz in 2.1GHz spectrum, Axiata continues to explore opportunities to strengthen 3G service but tightlipped on the rumored Axis acquisition. The merger is possible considering that their spectrum allocations are adjacent to each other (see Figure #1). At this juncture, we are neutral as Axis’ price tag may not be cheap (moreover, financial health is challenging to meet Axiata’s requirement). Catalyst hinges on execution to reposition XL as a premium telco from a discounter on the back of enlarged capacity.

Both FY12’s final (15 sen) and special (12 sen) dividends was approved by shareholders with ex-date on 29 May.

Catalysts

• Higher smartphone penetration boosting data ARPU.
• Strong growth in developing markets with low penetration.
• More cost savings from collaboration with DiGi.

Risks

• Regulatory risks, FOREX fluctuations, competitive risks, OTT threats (voice and messaging substitution).

Forecasts

Unchanged.

Rating

HOLD, TP: RM6.63

Positives – Smaller OpCos (Dialog and Robi) are gaining tractions offsetting the shortcomings from XL, in-country consolidation and monetizing tower assets.

Negatives – OTT eroding margins of traditional services, exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation

• Maintain HOLD call on the stock with unchanged SOP TP of RM6.63

Source: Hong Leong Investment Bank Research - 27 May 2013