Axiata Celcom will continue to focus on cost saving and enhancing its data margin through its micro segmentation approach and migrating its data users to the higher-margin medium-and-small screen plans. Meanwhile, management did not deny that it is eyeing Axis Indonesia but highlighted that pricing will be the key consideration factor. Competition-wise, the group’s competitive environment in its operating subsidiaries remained healthy except for Indonesia, where heightened competitions, new SMS interconnection rates as well as an accelerated investment in a data network has put its profitability under pressure. Nevertheless, XL’s management has started to take several approaches to mitigate the challenges. Post its 1QFY13 results, we have fine-tuned our Axiata’s earnings by lifting the net profit forecasts for FY13 and FY14 to RM2.81b (+0.4%) and  RM2.88b (+0.2%) respectively. We have raised our Axiata target price marginally to RM6.99 (from RM6.95 previously) based on an unchanged targeted FY14 EV/forward EBITDA of 8.5x (+1.5 SD). 

Celcom continues to focus on cost saving and enhancing its data margin through its micro segmentation approach (project zoom), which is aimed at improving its network efficiency and lowering the marketing cost. Meanwhile, the group is also planning to migrate its lower margin (~18%) large-screen dongle users to the medium-and-small screens, which generally fetch a higher margin of around 40%. As for the group’s LTE plan, Celcom intends to complete deploying 1,200 of the LTE sites by 2Q14 that will use a mixture of its 1800 MHz and 260 MHz spectrums with an aim to cover 60% targeted population. Nevertheless, Celcom has remained silent on its LTE plans pricing due to marketing strategy purposes. On top of that, Celcom indicated that it would start to roll out its fibre plan in July, where the group would bundle its mobile services with Telekom Malaysia’s HSBB. 

Potential acquisition of PT Axis by XL Axiata is on the cards. Management did not deny that XL Axiata is currently evaluating the bid for the country’s number five player, Axis Telekom but highlighted that pricing would be the key consideration factor for it to make any decisions. Axiata also highlighted that in-country consolidation has always been an option for the group to further enhance the value of its operating subsidiaries. With the expected industry consolidation in Indonesia, we understand that one of the key rationales to acquire PT Axis Telekom, if it materialises, is to expand XL Axiata’s 3G spectrum block. By having a larger 3G spectrum band, more network efficiency is likely to be achieved thus helping to reduce XL’s capex spending when it rolls out its massive 3G network coverage. Axis Indonesia is 80.1% owned by Saudi Telecom and has a market valuation of around USD1.0b, including debts, according to an estimate  form Saudi Fransi Capital. Subscriber-base wise, PT Axis is believed  to have around 17.7m mobile subscribers in contrast to the 49.1m subscribers in XL as of 1QFY13. 

Competitive environment in its operating subsidiaries remains healthy except for Indonesia. Axiata remained optimistic that it would sail through the challenging waves in its key operating subsidiaries despite the intensifying competitions. Nevertheless, heightened competition and cost pressure (mainly from product pricings, SMS interconnection rates and continuing data network investments) have put XL’s  profitability under pressure. To mitigate the earnings impact, XL has started to adjust its product pricings and is aggressively defending its SMS market with various product offerings since 1Q13. Meanwhile, the rate of capex and opex spending for the data network expansion in XL is also under review.

Source: Kenanga