Highlights

Carving out Infrastructure (except XL) to be a standalone group level business unit as a strategic initiative to unlock value and driving operational efficiencies (reduce OPEX and CAPEX which accounts for 11.6% and 13.7% of group’s cost and depreciation respectively) through specialization. This separation of operations and assets is perceived as a preparation for the planned tower REIT listing, which is believed to be in the midst of regulatory clearance.

Initiatives to sustain cost leadership includes centralizing procurement function by creating Shared Service Centre, infrastructure sharing, reduce marketing expenses through more targeted promotions, collaborations (telcos and OTTs), outsourcing and standardization / streamlining processes.

Data play – relentless focus on rationalizing aggressive CAPEX as well as increasing yield by targeting small and medium screen users and introducing innovative pricing / bundling to monetize data investments. Target to increase 3G capacity utilization beyond 50% for Celcom (currently ~40%), XL (~10%) and Dialog (~35%) in order to improve data EBITDA margin significantly. Nonetheless, it continues to experience OTT cannibalization on its traditional voice and messaging revenues.

As all markets’ smartphone penetrations are still way below matured markets’ average rate of ~56%, Axiata sees huge growth potential in data revenue and yield as they are highly correlated. For example, in Celcom, increase in smartphone penetration will lead to ARPU accretion by RM10-15.

Micro-segmentation – to better understand subscribers’ usage behaviors / profiles in order to tailor more targeted tactical campaigns to spur usage.

Regulatory – signs of improvements are observed in South Asia and positive on the progress of global 700MHz band harmonization under APT plan (refer to our report titled “4G LTE on 700MHz” dated June 20th, 2013). Most of Axiata’s footprint countries have declared their adoption.

Invest moderately in digital services including payment, advertising and entertainment. The newly launched content portal named “Escape” enjoyed initial success with more than 1m unique visitors within a month.

Continue to pursue in-country consolidation as well as new footprint cautiously and opportunistically in within the region.

Catalysts

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

Risks

Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

Unchanged.

Rating

HOLD, TP: RM7.05

Positives – Despite the challenging environment, Axiata’s main OpCo (Celcom, XL, Dialog) continue to execute well.

Negatives – Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation

Maintain HOLD call on the stock based on unchanged SOPderived fair value of RM7.05 (see Figure #2).

Source:Hong Leong Investment Bank Research - 9 Oct 2013