Results

• FY14 sales of RM18.7bn was translated into a core net profit of RM2.25bn, below expectations as it accounted for 94.1% and 91.9% of HLIB and consensus FY forecasts, respectively.

Deviations

• Larger-than-expected D&A coming from XL after the merger with Axis.

Dividend

• Recommended final single-tier tax exempt dividend of 14 sen (4Q13: 14 sen) per share subject to shareholders’ approval.

• YTD dividend of 22 sen per share (FY13: 22 sen) is within expectations. This represents 84% payout ratio, higher than FY13’s 75% and in line with progressive dividend policy.

Highlights

• Missed all FY14 headline KPIs, dragged by two of its largest OpCos (Celcom and XL) despite Dialog, Robi and Smart outperformed in their respective markets coupled with higher contributions from associates (M1 and Idea).

• Celcom: YTD sales contracted 4% yoy to RM7.7bn as subscriber base churned by 278k qoq and ended with 13.0m. Weakness was due to ongoing IT transformation limiting the introduction of competitive new products. Data revenue inched up 24% yoy while small screen data grew at an even more encouraging rate of 50%.

• XL: Sales expanded 10% yoy as all product segment registered healthy growths led by VAS with 50% yoy and followed by data, voice and SMS with 42%, 3% and 3% yoy, respectively. Data’s contribution to overall revenue edged up 6-ppt yoy to 29% as traffic increased 126.7% yoy. EBITDA margin declined from 41% to 37% due to bleeding Axis.

• FY15 headline KPIs: 1. Revenue growth = 4.0%; 2. EBITDA growth = 4.0%; 3. ROIC = 8.7%; 4. ROCE = 7.7%; and 5. CAPEX of RM4.8bn.

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

• Tweaked model based on latest operational data, deviation and headline KPIs above which led to downward revisions of FY15-16 EPS by 6.8% and 6.9%, respectively.

Rating

BUY , TP: RM7.52

Positives

• mobile internet growth, margin improvementsthrough 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 BUY although SOP-derived TP was cut marginally by 1.0% from RM7.59 to RM7.52 (see Figure #9) reflecting the downward earnings revisions. Tan J Young jytan@hlib.hongleong.com.my (603) 2168 1082 KLCI 1815.9 Expected share price return 4.9% Expected dividend return 3.5% Expected total return 8.4% Share price 1600 1700 1800 1900 6.0 6.5 7.0 7.5 Feb-14 Apr-14 Jul-14 Sep-14 Nov-14 Jan-15 RM

Source: Hong Leong Investment Bank Research - 26 Feb 2015