Results

• 1Q16 sales of RM5bn was translated into a core net profit of RM464m which came in below expectations, accounting for circa 18% of HLIB and street full year forecasts, respectively.

Deviations

• Celcom’s recovery was weaker-than-expected impacted by voice and value added services (VAS) glitches.

• Softness in Robi attributable to heightened competition and SIM bio-metric registration.

Dividend

• None (1Q15: none).

Highlights

• A dismal start for FY16 while regulatory and competition risks are believed to outweigh opportunities for growth going forward. The only apparent near term excitement would be Ncell’s consolidation.

• Celcom: High volume of complaints forced the reset of VAS products and migration to new platform that led to the drop of 20% yoy VAS sales. Postpaid gained 37k users at the expense of ARPU erosion by RM9 qoq while prepaid base continued to churn for the 2nd consecutive quarters despite lower ARPU of RM29 (see Figure #4).

• Celcom is confident to benefit from the recent online debacle surrounding Maxis’ preferential offerings as daily postpaid registration surged from 900 to 3k. Extra focus to grab more market share from the increasing migrant population. Plan to launch converged (fixed and mobile) products in Jul 16.

• XL: 3R transformation continued to deliver favorable results, charting yoy improvements in operational and financial indicators. But, some sequential weaknesses attributable to seasonality were also observed, including lower postpaid base and blended ARPU (-5% qoq from IDR41k to IDR39k) despite being value centric.

• Robi: Undesired regulatory environment as government mulls to levy its merger with Airtel which may eventually nullified the deal. Without the deal, Robi may need to fork out more for future spectrum.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and in-country consolidations.

Risks

• Regulatory risks, price wars and high gearing level.

Forecasts

• Celcom and Robi and downward earnings revision have led to cut in FY16-17 EPS by 7.9% and 7.5%, respectively.

Rating

HOLD , TP: RM5.92

Positives

• mobile internet growth, margin improvements through collaborations/sharing and unlock value through tower listing.

Negatives

• Higher cost for spectra, OTT threat substituting voice and SMS and unable to monetize data.

Valuation

• Reiterate HOLD with a lower SOP-derived TP of RM5.92 from RM6.25 reflecting our forecast revision and lower consensus TPs for associates (see Figure #8).

Source: Hong Leong Investment Bank Research - 26 May 2016