Highlights

• While sounded cautious and likely to under achieve KPIs, we believe that Axiata is embarking on the right approaches, absorbing the short-term pain for long-term sustainability. Majority of the hurdles are behind now and it is expecting gradual improvements ahead.

• Celcom: post BSS stabilization, there were signs of positive trade acceptance. Successfully reactivated Celcom exclusive partners from 2k back to early 2013’s level of 3k as dealers regained confident.

• Simplified postpaid plans were introduced and take up rate is encouraging, up from 800/day to 1.8k/day, eventually has led to rival’s reaction. New prepaid plans will follow soon. Not leveraging on heavy subsidy, aggressive device plans are also within the roadmap in the form of BYOD swap plan and rent-to-own / leasing model on the back of collaboration with Huawei, XiaoMi and Samsung.

• Prudent CAPEX budget of RM1.1bn target to elevate LTE population coverage from 15% with 1.7k sites to 30% with 2k sites by FY15 with emphasis on QoS.

• Nonetheless, 2Q15 to be rather soft due to industry wide GST complications led dealers’ refusal to sell reloads. Plan to be aggressive in 2H15 building on the Ramadhan momentum.

• XL: committed to the new strategy as a response to the changing market dynamics and consumer behavior. Not concern of the high churn of low value subs, instead focusing on retention, increase wallet share and acquiring high value subs. No reaction from competitors as they continue to play intensified gross add tactic. Believes that 1Q15 is the bottom and will gradually improve with a stronger turnaround in 2H15.

• Not comfortable of its debt profile which is skewed towards USD and will explore ways to pare them down. Disposal of the 6.5k towers remains an option to achieve that.

• edotco: owns 13k towers with tenancy ratio rose from 1.35 to 1.50. Aspired to standalone within 3-5 years while improving efficiency and monetization plan is not immediate.

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

BUY , TP: RM7.52

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

• Reiterate BUY on the back of unchanged SOP-derived TP of RM7.52 (see Figure #2).

Source: Hong Leong Investment Bank Research - 21 May 2015