Axiata’s 1H18 core net profit of RM431m (-33% YoY) missed estimates due to higher operational costs at Celcom and XL. Celcom’s sub base grew along with ARPU. Prepaid SIM registration is over and XL expects to experience positive impact on the long term. Ncell’s dwindling ILD income is expected to be cushioned by data expansion. We cut our earnings leading to a lower TP of RM4.68. Maintain HOLD.

Below expectations: 1H18 turnover of RM11.6bn translated in to a core net profit of RM431m, accounting for 33% and 35% of HLIB and street’s full year forecasts, respectively. Weaker-than-expected EBITDA margins at Celcom and XL were identified as major culprits.

Dividend: Declared an interim single tier tax exempt dividend of 5 sen per share (2Q17: 5 sen). Entitlement and payment dates will be announced later.

QoQ: Revenue inched up 2% thanks to higher contributions from all OpCos and MFRS impact. After the adjustment of one-offs which largely due to Idea provision for de-recognition from associate to simple investment (RM3.2bn), core net profit was higher by 21% thanks to higher contributions from associates.

YoY: Top line fell 3% mainly due to unfavourable FOREX while partly lifted by MFRS- 15. At constant currency, revenue was actually higher by 6.5% thanks to improved contributions from Celcom. However, core PAT was lower by 33% even after excluding one-offs chiefly attributable to higher D&A and corporate tax.

YTD: Turnover was down by 3% as RM strengthened against all regional currencies. At constant currency, top line was stronger by 7.3% driven by better performances from all OpCos except Smart. Core net profit plunged 33% attributable to weaker EBITDA margins and higher corporate tax.

Celcom: Sub base enlarged to reach 9.6m marking second consecutive quarter of net adds, with postpaid and prepaid expanded by 10k and 17k, respectively. Blended ARPU strengthened to RM48 (+RM1 QoQ). LTE population coverage stood at 89% and spurred smartphone penetration to reach 76% (2Q17: 69%). Data consumption was upped 20% QoQ to 11.4GB per month per sub. Idham Nawawi will replace Michael Kuehner as CEO with effect from 1 Sep 2018.

XL: 1H18 core earnings remained in red with net loss of IDR64bn. This weakness was due to higher D&A and lower tax benefit. Postpaid base expanded with ARPU erosion while prepaid ARPU gain caused attrition. Prepaid SIM registration is over and expect positive impact on the long term. Data growth remains solid supported by network quality and smartphone adoption. Lifted revenue growth guidance but still unexciting.

Ncell: Top line gained 5% YoY but core net profit was down by 15%, impacted by one-off prior year tax assessment and asset impairment. While ILD usage continue its downtrend, data revenue grew 34% YoY accounting for 22% of turnover, in tandem with the 11-ppt gain in smartphone penetration rate to reach 58%.

Forecast: Adjusted model based on the deviations above and latest operating data. As a result, FY18-20 EPS were lowered by 29%, 32% and 30%, respectively. Reiterate HOLD after lowering our SOP derived TP by 4% from RM5.88 to RM4.68, 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 - 27 Aug 2018