Highlights

We left the conference call feeling neutral due to lack of catalyst. Near term headwinds faced by XL in the midst of Axis consolidation and the lackluster growth in Celcom should be cushioned by other OpCos. Asset monetization via tower listing is a longer term boon.

While the absence of USP revenue has dwarfed 1Q14 top line, Celcom is confident to clinch some USP projects in 2Q and 3Q with the quantum of RM150-200m per quarter. We reckon that they are eyeing the highly lucrative 1k telco transmission towers to be awarded by MCMC.

Celcom is bullish about data trends as traffic volume doubled yoy, elevating data margins from 20’s to a target of low to mid 30’s. Currently, ~500k broadband dongle users contribute 7-8% of revenue.

Celcom’s data-centric CAPEX of ~RM1bn is inclusive of 1.2k 4G LTE sites with half located in Klang Valley and the rest outside KV prioritized in its stronghold state capitals. Rollout criteria includes data demand pattern, users’ propensity, smartphone penetration and device availability.

Backhaul transmission capacity / node fiberization to support LTE rollout is not a concern and confident that Celcom has an upper hand over peers thanks to its 3 effective pronged approaches: (1) co-build with DiGi; (2) exchange capacity with peers; and (3) lease from TM.

Decline of SMS revenue has yet to reach bottom with OTT cannibalization continue to be severe.

Moderately concern about TM-P1’s as long term threat and believes Celcom still has an edge in terms of coverage, solid mobile experience and extensive distribution network. However, it concur our view that it is an inevitable strategy.

To date, XL has completed the integrations of workforce, channel and distribution. >50% of Axis subs have been successfully migrated to XL’s billing system while >40% of Axis’ traffic footprint has been smoothly cutover as well. This has led to OPEX reduction of ~40% since October 2013.

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

Maintained.

Rating

HOLD, TP: RM6.92

Positives – mobile internet growth, margin improvements through collaborations/sharing, recoups prepaid tax via GST, unlock value through tower listing.

Negatives – Challenging operating environment in Indonesia, Axis to weigh down XL in the short term, OTT substituting voice and SMS, unable to monetize data.

Valuation

Maintain HOLD with unchanged SOP-derived TP of RM6.92 (see Figure #2).

Source: Hong Leong Investment Bank Research - 29 May 2014