Axiata’s 1Q19 core net profit of RM209m (+34% QoQ, +7% YoY) missed expectations. Celcom as a key contributor was a major drag. As management emphasis more on profitability, 1Q19 bottom line QoQ and YoY growths accelerated at a faster rate relative to top line. We raise our TP to RM4.15 as the downward earnings revision was cushioned by consensus’ higher valuation for Idea and improved net debt position post M1 disposal. Maintain HOLD.

Below expectations. 1Q19 turnover of RM7bn translated in to a disappointing core net profit of RM209m (+34% QoQ, +7% YoY), accounting for 18% and 17% of our and consensus full year estimates, respectively. The deviation was due to higher-than expected D&A and interest expense. Major adjustment items include gains from forex (RM20m), XL tower disposal (RM92m), M1 disposal (RM113m), Axiata Digital divestment (RM302m) and others (-RM28m).

Dividend. None (1Q18: None).

QoQ. Sales declined by 5% as most OpCos recorded weaker performances partly due to seasonal softness, where Celcom -13%, Dialog -3%, Ncell -3% and Smart -5%. These were more than offset the improvements in XL (+1%) and Robi (+2%). However, core net profit expanded by 34% to RM209m thanks to lower operating cost as Axiata put more emphasis on profitability than revenue market share growth.

YoY. Top line grew by 4% driven by expansions from most of the OpCos, where XL +9%, Robi +16%, Smart +20% while Dialog was rather flat. Together, they were more than sufficient to offset the underperformances from Celcom (-7%) and Ncell (-10%). Post adjustments, core earnings gained 7% as 1Q18 was dragged by Idea losses. If Idea losses are excluded, 1Q19 core PATAMI actually plunged by -33% from 1Q18’s RM310m.

Celcom. Sub base experienced a net churn of 128k and ended 1Q19 with 8.9m subs as both postpaid and prepaid saw churns of 10k and 118k, respectively. Blended ARPU weakened to RM49 (-RM1 QoQ) dragged by both prepaid (-RM2 QoQ) and postpaid (-RM3 QoQ). LTE population coverage was extended to 93% and spurred smartphone penetration to reach 80% (4Q18: 78%). Surprisingly, data consumption saw an unexpected 4% decline to 14.8GB per month per sub.

XL. Consistent strategy execution resulted in a strong start with revenue +9%, EBITDA +15% and return to the black with core net profit +319%. XL is the most data centric telco with 84% smartphone penetration and data revenue grew 25% YoY to account for 86% of service revenue in 1Q19. Continued network investment across Indonesia, in particular ex-Java, with 4G services now available in around 405 cities supported by more than 33k eNodeB.

Forecast. Tweak our assumptions based on the deviations mentioned above as well as updating our model based on FY18 audited accounts. In turn, our FY19-20 EPS projections were revised by -6% and -19%, respectively. Reiterate HOLD with a slightly higher SOP-derived TP of RM4.15 (see Figure #2) as impact from downward earnings revision was cushioned by the higher Idea valuation by consensus and improved net debt position post M1 disposal for cash proceed of RM1.65bn. We like its regional exposures with focus on emerging countries which may deliver great growth potentials. However, regulatory and execution risks are major concerns. Mega merger with Telenor Asia is a near term catalyst.

Source: Hong Leong Investment Bank Research - 29 May 2019