Highlights

The advent of OTT player and proliferation of smart devices have eroded SMS contribution by 2.3-ppt yoy as turnover plunged by 11.2% yoy to RM580m, with the hardest impact from Celcom. While this deficit is offset by data revenue growth, Celcom relentlessly explores new avenues to neutralize this threat, including partnership with OTT such as SMS-based Facebook status update.

Equipped with new BSS (business support system), Celcom will be introducing new service packages / bundling in mid- Dec to tackle behavioral usage patter over the spectrum of home, nomadic and mobile rather than focusing on multitude of price points.

Celcom’s broadband performance is encouraging, supported by increasing subscribers and favorable tablet replacement cycle. 35% of broadband users are also tablet owners.

Celcom is expecting a 4-5% growth in FY14 with focus on core business as well as digital services and OTT.

To work closely with regulator on 3G service quality scrutiny and do not expect this to deviate in CAPEX guidance.

Although XL has yet to receive official regulatory approval, Axis’ acquisition is on tract and expect to complete by 1Q14.

Guidance: sales growth will be slightly lower than KPI of 7.6% while EBITDA growth will be under some pressure to meet the KPI of 0.2% mainly due to XL’s underperformance. FY13 CAPEX will also be lower at RM4.0-4.1bn, while FY14’s will be at 20% of turnover or lower.

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

Updated model with latest operational data and D&A. As a result, FY13-15 EPS were revised upward by +6.9%, 0.2% and 0.3% respectively.

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

As forecast revision only materially affected FY13 earnings, SOP-derived fair value of RM7.05 (see Figure #2) is unchanged. Maintain HOLD rating on the stock.

Source: Hong Leong Investment Bank Research- 29 Nov 2013