1H20 core net profit of RM172m (-61% YoY) missed expectations due to higher than-expected cost structure and D&A. Declared a single tier tax exempt DPS of 2 sen. While XL and edotco were rather immune, all other OpCos were impacted by Covid-19 disruptions with Ncell being hardest hit. We slashed FY20-22 earnings 7-16% and TP is lowered to RM3.36. Maintain HOLD. While regulatory (especially in Nepal) and execution risks remains, long term catalysts include in country consolidation, tower asset and digital businesses listings.

Below expectations. 2Q20 core net profit of RM47m (-62% QoQ, -79% YoY) brought 1H20’s sum to RM172m (-61% YoY), which missed expectations, only formed 25% and 21% of HLIB and consensus full year forecasts, respectively. Major deviations were attributable to higher-than-expected cost structure and D&A. 2Q20 one-off adjustments include XL tower disposal gain (RM41m), forex gain (RM33m) and other losses (RM41m).

Dividend. Declared a single tier tax exempt DPS of 2 sen (2Q19: 5 sen). Entitlement and payment dates will be determined and announced in due course. YTD DPS amounted to 2 sen (1H19: 5 sen).

QoQ. Turnover lost 4% attributable to contractions led by Ncell (-29%), followed by Celcom (-7%), Robi (-6%) and Dialog (-4%). While XL and Smart were flat, edotco (+3%) was the only one recording growth. In turn, core net profit nosedived 62% to RM47m due to higher effective corporate tax rate of 61% (vs. 1Q20: 35%).

YoY. Top line fell 6% where expansions from XL (+5%) and edotco (+8%) were fully overcome by falls in Ncell (-39%), Celcom (-13%), Dialog (-6%), Robi (-2%) while Smart was flat. Subsequently, core earnings plunged 79% due to higher D&A (+8%) and higher tax rate (2Q19: 54%).

YTD. Revenue fell 2% due to Covid-19 disruptions. For the same reasons above, core earnings declined 61% to RM172m.

Celcom. Sub base experienced a net gain of 45k in 2Q20 and ended with 8m subs as prepaid’s addition of 60k was sufficient to offset postpaid’s churn of 14k. Blended ARPU slipped to RM47 (-RM2 QoQ). LTE population coverage was stagnant at 93% along with smartphone penetration at 85% (2Q19: 82%).

XL. Total base added by 185k QoQ to 55.7m subs. Postpaid lost 14k subs QoQ while prepaid gained 200k subs. Prepaid ARPU rose IDR2k QoQ to IDR36k while postpaid’s weakened by 3% QoQ (or IDR3k) to IDR111k. With the improved coverage and more affordable device bundle offerings, 89% of total base or 50m are data users generating 1,250PB of total traffic in 1H20, up 49% YoY.

Forecast. Tweak model based on the deviations above. In turn, FY20-22 EPS are lowered by 16%, 7% and 8%, respectively.

Reiterate HOLD with lower SOP-derived TP of RM3.36 (see Figure #2) from RM3.91 after lowering the valuations for Celcom, XL and Ncell. We like its regional exposures with focus on emerging countries which may deliver great growth potential. However, regulatory (especially in Nepal) and execution risks are major concerns. With the mega merger called off, other potential corporate exercises that may unlock values include in-country consolidation, tower asset and digital businesses listings.

Source: Hong Leong Investment Bank Research - 28 Aug 2020