• Celcom and XL underperformed - Axiata’s 3Q16 normalised PATAMI decreased 1.9% YoY to RM516m as lower profits from Celcom and XL overshadowed growth in smaller operating companies. Reported PATAMI plunged 71.2% YoY to RM257m on forex losses, accelerated depreciation in XL and Robi, as well as adjustment in Ncell’s purchase price allocation.

• Revenue lifted by Ncell’s inclusion – 3Q16 revenue grew 7.7% YoY to RM5.46bn mainly due to contribution from newly-acquired Ncell. Without the Nepalese subsidiary, revenue would have dropped 3.1% YoY mainly due to loss of sales in Celcom and XL.

• Improved QoQ earnings – On a quarterly basis, normalised PATAMI climbed 36% QoQ mainly on higher contribution from Ncell and associate companies. Revenue grew 2.8% QoQ as all operating companies posted higher revenue YoY except for Celcom and Smart.

• Celcom drags down earnings - Celcom’s 3Q16 revenue dipped 22.7% YoY due to decline in revenue contribution from Value Added Services (VAS) and overseas foreign workers. Prepaid subs dropped for a fourth consecutive quarter to 8.29m (vs 8.34m in 2Q16) while postpaid subs decreased slightly to 2.87m (vs 2.9m in 2Q16).

• XL continues facing challenges – Still undergoing its transformation program, XL continued to post small loss due to lower ARPU amid price pressure despite adding 1m subs.

• Smaller op-cos continue to grow – Dialog and Smart continued their double-digit revenue growths while Robi posted flat results after the completion of its SIM bio metric registration.

Earnings Outlook/Revision

• Below expectation – Nine months’ normalized PATAMI of RM1.34bn account for 61.4% of full year estimate while revenue of RM15.8bn makes up 70.8% of FY16 forecast.

• Forecast reduced – We are lowering our EPS forecast for FY16 and FY17 by 15.8% and 13.8% respectively following higher network cost and anticipated higher depreciation while keeping revenue forecasts unchanged.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM5.10 (from RM5.66) following our earnings cut as valuation is based on Sum-Of-Parts (SOP).

Source: JF Apex Securities Research - 25 Nov 2016