Axiata’s 1Q18 core net profit of RM195m (-7% QoQ; -33% YoY) missed estimates due to higher operational costs and Idea’s deteriorating performance. Celcom’s sub base grew at the expense of ARPU. Prepaid SIM registration will continue to drag XL in 2Q18 but expect healthier competition ahead. Ncell’s dwindling ILD income is expected to be cushioned by data expansion. We cut our earnings leading to a lower TP of RM4.88. Maintain HOLD.

Below expectations: 1Q18 turnover of RM5.7bn translated in to a core net profit of RM195m, accounting for 12% and 13% of HLIB and street’s full year forecasts, respectively. Major culprits include weak EBITDA margin and larger-than-expected Idea losses as competition intensifies in India.

QoQ: Revenue declined 8% mainly due to appreciation of RM and seasonal weakness experienced by all OpCos except Celcom. After the adjustment of one-offs including the loss in Idea’s dilution which amounted to RM358m, core net profit was lower by 7% due to higher operational costs.

YoY: Top line fell 2% mainly due to unfavourable FOREX while partly lifted by MFRS- 15. At constant currency, revenue was actually higher by 5% thanks to improved contributions from all OpCos except Smart. However, core PAT was lower by 33% even after excluding one-offs chiefly attributable to higher losses recorded by Idea.

Celcom: Sub base finally expanded to reach 9.6m after 4 consecutive quarters of attritions with postpaid and prepaid net adds of 4k and 47k, respectively. However, blended ARPU softened to RM47 (-RM1 QoQ). LTE population coverage stood at 88% and spurred smartphone penetration to reach 75% (1Q17: 66%). Data consumption was upped 12% QoQ to 9.5GB per month per sub. There will be short term impact on margins due to change in revenue mix and additional investment to enhance network experience. Management will continue to focus on cost optimization.

XL: SIM registration exercise has caused sales and marketing expense to balloon due to (1) higher A&P to entice subscribers; and (2) higher dealer commissions, in order to ensure the registration process is completed. While SIM registration impact is expected to spill over into 2Q18, XL remains positive and expects a healthier industry growth going forward as this will reduce rotational churn (20%-30% of total market) and SIM-related costs.

Ncell: Top line gained 4.3% YoY but core net profit was down by 22%, impacted by one-off prior year tax assessment. While ILD usage continue its downtrend, data revenue grew 35% YoY accounting for 22% of turnover, in tandem with the 12-ppt gain in smartphone penetration rate to reach 56%.

Forecast: Tweak model based on the deviations above and audited FY17 financial figures. In turn, FY18-20 EPS were lowered by 17%, 11% and 10%, respectively. Reiterate HOLD after lowering our SOP derived TP by 2.6% from RM5.01 to RM4.88, reflecting earnings downward revision. We like its regional exposures with focus on emerging countries which may deliver great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a catalyst.

Source: Hong Leong Investment Bank Research - 23 May 2018