Results

• 1H15 sales of RM9.46bn was translated into a core net profit of RM1.14bn which came in within expectation, accounting for 48.3% of HLIB’s full year forecast but shy of street’s estimate by 8.0% if annualized.

Deviations

• In line.

Dividend

• As expected, declared an interim single tier tax exempt dividend of 8 sen per share (2Q14: 8 sen).

Highlights

• The worst should be over as management is mildly optimistic into 2H15 with Celcom’s IT issue predominantly resolved while XL is experiencing promising signs at early stage of its transformation. At the same time, smaller OpCos continue to deliver strong performances coupled with steady contributions from associates.

• Celcom: Launched two products targeting at both postpaid and prepaid markets which successfully ceased sub attrition for the past three consecutive quarters by adding 61k subs. Although GST created market confusion and hampered consumer spend in early 2Q15, it is gradually regaining trade confidence post BSS stabilization. EBITDA margin gained 1.5-ppt qoq to 41.6% despite the one-off network transmission cost which was partly cushioned by the reversal in staff cost.

• XL: Transformation strategy was fruitful and is evident from few positive leading indicators including materially improving subscriber mix (high value subs), rising reloads per sub, joiner ARPU significantly higher than churners’ and an increased share of modern distribution versus traditional. Exploring ways to pare down its debt profile which skewed towards USD.

• Robi: Re-assessing the floatation proposal which may only materialize next year.

• Associates: Both Idea and M1 delivered strong results and contributed RM102m and RM81m, respectively in 1H15.

• Stronger USD will have a positive impact on revenue due to net inflow of IDD traffic. However, this will burden XL and Robi’s CAPEX (hardware) which will be mitigated through negotiation with suppliers.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and listing of Robi.

Risks

• Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

• Maintained.

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 #9).

Source: Hong Leong Investment Bank Research - 21 Aug 2015