Axiata’s 9M18 core net profit of RM668m (-33% YoY) matched ours but missed consensus. Overall performance was impacted by unfavourable forex, weaker EBITDA margin (Celcom’s ELP restructuring and digital investment) and higher D&A. Despite the stable ARPU, Celcom’s sub base was back into contraction mode in 3Q18. XL remained in the red although both postpaid and prepaid sub bases gained with resilient ARPU. We cut our TP to RM3.75 after factoring lower valuations for Celcom and XL in view of the prolonged turnaround. Maintain HOLD.

Within expectation. 9M18 turnover of RM17.6bn translated in to a core net profit of RM668m, matching our full year expectation at 72% but this is below consensus at 67%.

Dividend. None (3Q17: none) but a final dividend is expected in 4Q18. YTD dividend amounted to 5 (9M17: 5) sen per share.

QoQ. Revenue inched up 2% thanks to higher contributions from all OpCos except Celcom and Ncell as well as MFRS boost. After the adjustment of one-offs which largely due to forex and Idea provision for de-recognition from associate to simple investment, core net profit was flattish as improved EBITDA margin was neutralized by higher D&A and effective corporate tax.

YoY. Top line fell 3% mainly due to unfavourable FOREX while partly lifted by MFRS- 15. At constant currency, revenue was actually higher by 2.5%. However, core PAT was lower by 33% even after excluding one-offs chiefly attributable to higher cost structure and D&A.

YTD. Turnover was down by 3% as RM strengthened against all regional currencies. At constant currency, top line was stronger by 4.2% driven by better performances from all OpCos. Core net profit plunged 33% attributable to weaker EBITDA margins, higher D&A and digital investments.

Celcom. Sub base experienced a net churn and ended 3Q18 with 9.2m subs as it lost 447k prepaid subs, erasing the 53k postpaid net adds. Blended ARPU strengthened to RM49 (+RM1 QoQ) lifted by higher postpaid ARPU. LTE population coverage stood at 90% and spurred smartphone penetration to reach 79% (3Q17: 72%). Data consumption was upped 15% QoQ to 13.1GB per month per sub. It took a one-off Employee Life Plan (ELP) restructuring charge in 3Q18.

XL. 9M18 core earnings remained in red with net loss of IDR91bn. This weakness was due to higher D&A and interest expense. Capex allocation between Java and ex Java was 50:50. Continued to invest to provide high quality internet services by adding 3G and 4G nodes as well as in transmission backhaul. Both postpaid and prepaid bases gained on the back of resilient ARPUs. With the improved coverage, 80% of total base or 43m are data users generating 1,569PB of total traffic in 9M18, up 78% YoY. As affordability increased, smartphone users also grew 14% YoY, reaching 42m users or 78% of the total base.

Forecast. Unchanged as results were in line. Reiterate HOLD after lowering our SOP derived TP by 20% from RM4.68 to RM3.75. We reduced Celcom and XL’s valuations after scaling back TG to 0.5% (previously 1.5%) in view of their slower-than-expected turnarounds amid challenging market environments. 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 - 26 Nov 2018