We attended Axiata’s post-1Q14 result conference call yesterday. The key highlights of the meeting were: (i) the company’s outlook and earnings guidance, (ii) capex guidance, (iii) Celcom’s operational data updates as well as strategy moving forward, and (iv) observation of TM wireless ambition. Post-result meeting, we have lowered our FY14E (-0.9%) and FY15E (-0.5%) core net profits marginally after fine-tuning and taking management’s latest earnings guidance into consideration. We reiterate our MARKET PERFORM rating on Axiata but with a higher target price of RM6.96 (from RM6.57 previously) after rolling over the valuation base year to FY15E with a slightly higher targeted FY15 EV/forward EBITDA of 9.1x (vs. 9.0x previously), representing a 1.0x standard deviation above the mean of 3-year EV/forward EBITDA band.

FY14 guidance remains largely unchanged, where Axiata is expected to record 1.8% YoY growth in EBITDA, 9.3% in ROIC and ROCE of 7.8%. Its revenue growth target, however, was lowered to high single digit from 10.1% YoY previously, partly due to delay of Axis acquisition. Moving forward, Axiata will remain focused on its long term transformation strategy, which includes a new approach to current business and continue to invest aggressively in data and related services. Increasing competition and regulatory challenges will be its key risks faced by its companies. Voice and SMS substitution are expected to continue in Malaysia and Indonesia. As a result, increase in data traffic at profitable pricing remains a key for improving the group performance moving forward.

Capex guidance continued to stay at RM4.4b in FY14, of which RM1.0b will be allocated to Celcom while XL, Dialog, Robi, Smart, and other OpCos will be allocated RM1.8b-1.9b, RM500m, RM700m, RM150m, and RM200m, respectively. Axiata has spent RM1.03b (or 23%) of its annual capex allocation in 1Q14.

Improve network quality and capacity for better customer data experience will be the key focus for Celcom in FY14. Management indicated that Celcom’s average network utilisation merely stood at 30%-40% currently, suggesting ample rooms to grow moving forward. Celcom has completed modernising all its networks to single RAN but still needs another two years to modernise its network to IP-based networking, according to management. As for the LTE service, Celcom has rolled the service to major populated areas, including Klang Valley, Ipoh, Penang and Johor Bahru. The group aims to deploy 1,200 active sites nationwide by end-FY14 and had rolled out c.600 LTE sites in East Coast and West Malaysian major cities so far, where management indicated the network demand is high as its smartphone penetration rate had surpassed more than 50% in those suburban areas. Celcom has consumed RM140m capex in 1Q14. We understand that management plans to accelerate its capex spending in following quarters.

Threat from Telekom Malaysia (TM) wireless ambition? Axiata is not overly concerned on the partnership and collaboration agreement between TM, Green Packet and Korea-based SK Telecom. While TM is able to offer a full-suite converged communications service through P1’s LTE technology platform in coming months, Axiata believes, TM strength is still in the fixed-line services and thus, the company would be leverage its strength and competitiveness in the mobile segment. Axiata believes TM services would be targeted towards certain sectors as well as geographical areas and not across all sectors. Similarly, Axiata will follow suit when moving into the broadband services in the future.

Source: Kenanga