Highlights

• While key takeaways from the annual event are encouraging, we are more eager on execution and its effectiveness.
• Acknowledging that 2016 will be a washout, Axiata shared its newly formulated strategies to turnaround and achieve Vision 3.0 by 2020. 13 “Needle-Moving” initiatives were identified, covering the whole spectrum of the value chain. Each of the 13 initiatives has potential to contribute RM1bn in value to the group over the next 4 years.
• Celcom: Recognizing the root causes of the dismay showing were both internal and external, the new leadership team has prescribed 3 strategic themes: (1) radical simplification; (2) industry leading customer experience; and (3) deep digitalization. While 2017 market was projected to decline, Celcom’s CAPEX is largely data-oriented as data contribution is expected to surpass legacy services.
• XL: Serves the most data-savvy subs supported by widest 4G coverage but data growth was not sufficient to offset voice’s decline. As such, XL has repositioned its business model to data-led while protecting voice through bundling.
• edotco: Managing >25k towers dispersed over 5 countries, it is the 11th largest towerco in the world. Group tenancy ratio stood at 1.52x. It will be aggressive in M&A, eyeing for 1 or 2 more deals within SEA to attain the ripe size for IPO.
• May reduce stake in OpCos as capital reallocation measure instead of debt rationalization. Plan to reduce leverage (gross debt to EBITDA) down to 2.3x.
• Potential impairment in Idea following Vodafone’s fate. The latter took a EUR5bn write down on its India business last month due to cutthroat competition sparked by Jio.
• High level guidance: 2017 was projected to be a growth year in terms of revenue and EBITDA but with investments remain elevated, heightened rivalry and merger costs. Top line is expected to growth faster than EBITDA as cost optimization program is launched across the group. ROIC most likely to trend upwards in 2018.

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

• Unchanged.

Rating

HOLD ↔, TP: RM5.28 ↔

• Regional exposure with focus on emerging countries with great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a long term catalyst.

Valuation

• Reiterate HOLD despite more than 10% upside to TP as we prefer to remain cautious while closely monitor for turnaround indicators. SOP-derived TP is maintained at RM5.28 .

Source: Hong Leong Investment Bank Research - 13 Dec 2016