1Q22 core net profit of RM370m (-10% QoQ, +69% YoY) matched our and street forecasts. Celcom suffered sub attrition along with ARPU erosion. Similarly, Celcom’s ex-device revenue gained 5% YoY driven by prepaid and contribution from new Enterprise Solutions subsidiaries, Bridgenet Solutions and Infront. Our SOP-derived TP is reduced to RM3.49 after lowering Dialog’s valuation and factor in LKR depreciation. Maintain HOLD call. While we are positive on Celcom-Digi merger allowing Axiata to unlock values, regulatory (especially in Nepal) and economic (in Sri Lanka) risks are major concerns.

Within expectations. 1Q22 core net profit of RM370m (-10% QoQ, +69% YoY) accounted for 28% and 30% of HLIB and consensus full year forecasts, respectively. This is deemed in line as we expect weaker quarters ahead. 1Q22 one-off adjustments include tower disposal gain (-RM19m), forex loss (+RM392m) and others (+RM39m).

Dividend. None (1Q21: None).

QoQ. Turnover fell 6% led by Ncell (-6%), followed by Celcom (-5%), Smart (-5%), Dialog (-4%), XL (-3%) and Robi (-1%), more than sufficient to offset the sole gainer edotco (+6%). In turn, core net profit fell -10% to RM370m.

YoY. Top line was up by 7% thanks to higher contributions from Celcom (+1%), XL (+10%), Robi (+4%), Dialog (+7%), Smart (+10%) and edotco (+19%), while Ncell was the only OpCo that experienced decline (-9%). In turn, core earnings leaped 69% also attributable to lower D&A.

Celcom. Sub base experienced a total net churn of 11k QoQ in 1Q22 and ended with 9.6m subs as postpaid’s addition (+11k QoQ) was wiped out by prepaid’s attrition (-22k QoQ). Blended ARPU was eroded to RM43 (-RM2 QoQ). LTE population coverage expanded to 96% along with smartphone penetration at 93% (4Q21: 92%). Ex-device revenue gained 5% YoY driven by prepaid and contribution from new Enterprise Solutions subsidiaries, Bridgenet Solutions and Infront.

XL. Total base lost 900k QoQ to 57m subs as postpaid’s addition was neutralized by prepaid’s attritions. Prepaid and postpaid sub base ended 1Q22 with 55.6m and 1.4m, respectively. Prepaid ARPU was flat QoQ at IDR36k while postpaid’s was eroded by IDR8k QoQ to IDR98k. With the improved coverage and more affordable device bundle offerings, 93% of total base or 53m are smartphone users generating 1,857PB of total traffic in 1Q22, flat sequentially.

FY22 headline KPIs maintained. At constant currency, (1) revenue growth of mid single digit; (2) EBIT growth of high single digit; and (3) Capex of RM7.1bn broken-down to Celcom (RM1.0bn), XL (RM2.8bn), Dialog (RM700m), Smart (RM300m), Robi (RM700m), Ncell (RM250-300m), edotco (RM1.0bn) and digital business (RM300- 350m).

Forecast. Updated our model based on FY21 audited account. As a result, FY22-23 earnings projection are adjusted by 1%, respectively. We also introduce FY24 forecasts. Reiterate HOLD after trimming SOP-derived TP from RM4.03 to RM3.49 (see Figure #1) as we lower Dialog’s valuation to 5x EV/EBITDA (previously 6x) and factor in the depreciation of LKR. 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 economic (in Sri Lanka) 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 - 26 May 2022