9M20 Core Net Profit of RM546m (-21% YoY) Exceeded Expectations Thanks to Lower-than-expected D&A and Tax Expense. 3Q20 Staged a Strong Recovery Following the Easing of Lockdown While Earnings Multiplied QoQ Thanks to Efficiency Gain, Lower D&A and Tax Rate. We Raise FY20-22 Earnings 46-50% and TP Is Lifted to RM3.76. Maintain HOLD. While Regulatory (especially in Nepal) and Execution Risks Remains, Long Term Catalysts Include In-country Consolidation, Tower Asset and Digital Businesses Listings.

Above expectations. 3Q20 core net profit of RM374m (>+100% QoQ, +47% YoY) brought 9M20’s sum to RM546m (-21% YoY), which beat expectations, accounting for 95% and 85% of HLIB and consensus full year forecasts, respectively. Major deviations were attributable to lower-than-expected D&A and tax expense. 9M20 one-off adjustments include XL tower disposal gain (-RM353m), forex loss (+RM83m) and other losses (+RM194m).

Dividend. None (3Q19: None). YTD DPS Amounted to 2 Sen (1H19: 5 Sen).

QoQ. Turnover gained 6% following the easing of lockdown as most OpCos’ contributions expanded led by Ncell (+10%), followed by Celcom (+9%), Dialog (+7%), Robi (+7%), Smart (+3%), while edotco was flat and more than sufficient to offset the decline in XL (-2%). Core net profit multiplied by almost 7-fold to RM374m thanks to efficiency gain, lower D&A (-4%) and corporate tax rate (3Q20: 35% vs 2Q20: 61%).

YoY. Top line fell 2% where expansions from Robi (+2%), Dialog (+2%) and edotco (+1%) were fully neutralized by falls in Ncell (-30%), Celcom (-5%), XL (-2%), and Smart (-1%). However, core earnings surged 47% due to higher EBITDA margin, lower D&A (-5%) and tax expense (3Q19: 42%)

YTD. Revenue fell 2% due to Covid-19 disruptions, where gains from XL (+4%), edotco (+4%), Robi (+3%) and Smart (+2%) were entirely offset the contractions in Ncell (- 27%), Celcom (-8%) and Dialog (-1%). In turn, core earnings declined 21% to RM546m due to higher D&A and higher tax rate (9M20: 40% vs 9M19: 35%).

Celcom. Sub base experienced a total net gain of 373k QoQ in 3Q20 and ended with 8.4m subs as both prepaid and postpaid added 339k and 32k, respectively. Blended ARPU expanded to RM48 (+RM1 QoQ). LTE population coverage extended to 94% along with smartphone penetration at 86% (3Q19: 83%).

XL. Total base added 1.2m (or +2%) QoQ to 56.9m subs at the expense of ARPU. The gain was solely contributed by prepaid which has elevated to a base of 55.7m while postpaid was stagnant at 1.1m. Both prepaid and postpaid ARPUs were eroded by IDR1k QoQ to IDR35k and IDR110k, respectively due to competition. With the improved coverage and more affordable device bundle offerings, 88% of total base or 50m are smartphone users generating 3,496PB of total traffic in 9M20, up 47% YoY.

Forecast. Tweak model based on the deviations above. In turn, FY20-22 PATAMI are lifted by 46%, 50% and 47%, respectively.

Reiterate HOLD with higher SOP-derived TP of RM3.76 (see Figure #2) from RM3.36 as Celcom’s valuation is lifted after earnings revision. 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 incountry consolidation, tower asset and digital businesses listings.

Source: Hong Leong Investment Bank Research - 30 Nov 2020