Results

• 1H16 sales of RM10.3bn was translated into a core net profit of RM835m which came in below expectations, accounting for 37% and 34% of HLIB and street FY forecasts, respectively.

Deviations

• Celcom and XL’s results were weaker-than-expected.

• D&A after consolidation of Ncell.

Dividend

• Declared an interim single tier tax exempt dividend of 5 sen per share (2Q15: 8 sen).

Highlights

• YoY: The 13% uplift on revenue was due to consolidation of Ncell which was partly offset by the decline in Celcom. However, this was not reflected in profit which fell 37% weighed down by higher (1) D&A; (2) interest cost; (3) FOREX losses; and lower contributions from M1 and Idea.

• QoQ: Revenue grew 6% thanks to inclusion of Ncell but partly mitigated by declines in XL and Dialog. Similarly, this did not flow down to bottom line due to the same reasons above.

• Celcom: Despite the recovery in postpaid (+57k net adds), this was not sufficient to cushion the lingering VAS issue and dismay showing in the prepaid / migrant segments. It will undergo a refresh program under the new management team, equipped with modernized LTE network to make a strong come back into the market.

• XL: 2Q16 service revenue fell 4.6% as the decline in voice and SMS outpaced data’s growth. This is the first yoy drop since 3R was introduced last year, thus raising doubts about the effectiveness of the 3-year transformation program. Nonetheless, EBITDA margin strengthened by 3ppt to 39%. XL vowed to stay the course and as turning back will be even more damaging.

• Robi: Merger with Airtel is pending approval from High Court.

• Pricing and fee structure for spectrum reallocation in Malaysia is only expected to be announced next month.

• Axiata guided that it is likely to miss all headline KPIs with marginally lower revenue and EBITDA growths.

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

• Downward earnings revision for Celcom and XL has led to cut in FY16-17 EPS by 32% and 41%, respectively.

Rating

HOLD, TP: RM5.64

• 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 RM5.64 from RM5.92 reflecting our forecast revision (see Figure #10).

Source: Hong Leong Investment Bank Research - 26 Aug 2016