1Q21 core net profit of RM218m (-32% QoQ, +75% YoY) missed expectations due to higher-than-expected D&A and tax rate. Celcom grew its sub base at the expense of ARPU while its bottom line was impacted by retrenchment cost and accelerated depreciation. Besides the pending Celcom-Digi merger, ADA attracted RM250m investment from SoftBank. We maintain our HOLD call with a lower SOP-derived TP of RM3.51.

Below expectations. 1Q21 core net profit of RM218m (-32% QoQ, +75% YoY) came in below expectations, accounting for 17% and 20% of our and consensus full year estimates, respectively. The shortfall was mainly attributable to higher-than-expected D&A and tax rate. 1Q21 one-off adjustments include forex loss (+RM108m), gain on tower disposals (-RM19m) and other losses (+RM54m).

Dividend. None (1Q20: None).

QoQ. Turnover fell 3% led by Smart (-13%), followed by Dialog (-4%), edotco (-3%) and XL (-1%) more than sufficient to offset the gains in Celcom (+1%), Ncell (+2%) and Robi (+2%). However, core net profit contracted at a faster rate of 32% to RM218m due to higher effective corporate tax rate and MI charge.

YoY. Top line was flat as expansions from Celcom (+5%), Dialog (+2%), Smart (+4%) and edotco (+4%) were fully neutralized by the declines in Ncell (-15%), XL (-6%) and Robi (-1%). Despite the higher D&A and effective corporate tax rate, core earnings gained 75% due to improved EBITDA margin

Celcom. Sub base experienced a total net gain of 316k QoQ in 1Q21 and ended with 9.0m subs as both prepaid and postpaid added 291k and 27k, respectively. Blended ARPU eroded to RM45 (-RM1 QoQ) partly due to the decline in roaming revenue. LTE population coverage expanded to 93% along with smartphone penetration at 89% (4Q20: 88%). In 1Q21, Celcom was impacted by Employee Restructuring Programme and accelerated depreciation (associated with 3G sunset) amounted to RM77m and RM123m, respectively.

XL. Total base churned 1.9m (or -3%) QoQ to 56.0m subs as the prepaid attrition completely offset the 30k gain in postpaid subs. Prepaid and postpaid sub base ended 1Q21 with 54.8m and 1.2m, respectively. Prepaid ARPUs was stable at IDR33k while postpaid’s was eroded by IDR2k QoQ to IDR108k due to price competition. With the improved coverage and more affordable device bundle offerings, 90% of total base or 50m (-2m QoQ) are smartphone users generating 1,391PB of total traffic in 1Q21, up 40% YoY.

Corporate developments. (1) Announced intention to create the Malaysian digital telco champion through merger of Celcom and Digi; (2) ADA announced RM250m investment from SoftBank to accelerate expansion of Axiata’s digital and analytics business while SoftBank to make ADA its digital marketing partner in SEA.

Forecast. After tweaking our forecast based on the deviations above, FY21 and FY22 earnings are slashed by 33% an 20%, respectively. Reiterate HOLD after lowering our SOP-derived TP from RM3.76 to RM3.51 (see Figure #2). We like its regional exposures with focus on emerging countries which may deliver great growth potentials. While we are positive on Celcom-Digi merger allowing Axiata to unlock values, regulatory (especially in Nepal) and execution risks are major concerns. Other potential corporate exercises that may unlock values include tower asset and digital businesses listings.

Source: Hong Leong Investment Bank Research - 27 May 2021