Period  3Q14/9M14

Actual vs. Expectations Axiata’s 9M14 core PATAMI of RM1.79b (-16.7% YoY) came in below expectations and accounted for 67.8% of our forecast, and 68.1% of the street’s, full-year estimate.

 The key negative variance on our end was mainly due to weaker-than-expected Celcom performance (as a result of the IT transformation that caused network quality issue as well as higher network-related costs) and XL due to Axis integration costs.

Dividends  No dividend was declared, as expected.

Key Results Highlights YoY, the group’s 9M14 turnover improved marginally by 0.3% to RM13.9b (vs. 4.2% at constant currency level), mainly driven by higher contribution from all key operating companies except Celcom (-3.7% to RM5.8b) and XL (-1.6% to RM4.8b). The former was impacted by the poor SMS (-27%) and voice revenue (-4%), no thanks to the poor network quality issues that caused by the system related issues and absent of new product launching. The latter, meanwhile, was affected by the strengthening RM against IDR. Group EBITDA, meanwhile, declined by 5.9% to RM5.2b with a lower margin of 37.6% (vs. 40.1% a year ago) due to impact of the acquisition of Axis. PATAMI fell 11% as a result of lower EBITDA from Celcom and XL as well as forex losses.

 QoQ, 3Q14 turnover was lower by 1.6% due to lower revenue in XL, Celcom and Robi. At constant currency, group revenue would have registered marginal decline of 0.4%. EBITDA, meanwhile, eased by 2.4% while margin declined by 0.3 ppts to 36.5%. PATAMI, however, surged 41% mainly due to one-off gain on disposal of SIM of RM116.7m and lower foreign exchange losses at XL.

 Celcom’s service revenue declined 3.5% YoY (or -3% QoQ) to RM1.78b in 3Q14, no thanks to lower Voice (-7.1% YoY to RM1.1b) and SMS (-30.8% YoY to RM125m) revenue but mitigated by higher advanced data segment (14.5% YoY to RM579m) contribution. Group’s EBITDA dipped 9% QoQ to RM729m with a lower margin of 42.9% (vs. 45.9% in 2Q14). Celcom recorded a total of 195k negative subscriber's net adds in 3Q14, reducing its total subscriber base to 13.2m. Blended ARPU, meanwhile, eased RM2 to RM44 while broadband ARPU continued its downtrend to RM49 (vs. 2Q14: RM51; 3Q13: RM57).

Outlook  Management is confident of regaining growth momentum at Celcom in 4Q14 post the IT transformation programme. Moving forward, the group will remain focused on its longterm transformation strategy, which includes innovative measures in current business whilst intensifying initiatives in data and related offering.

Change to Forecasts    Post-results, we have lowered our FY14-15E earnings forecasts by 7.6% and 1.1%, respectively, after raising Celcom’s network cost assumption and lowering earnings forecast from XL.

Rating Maintain MARKET PERFORM

Valuation  Lowered our TP for Axiata to RM6.88 (from RM6.92 previously) based on targeted FY15E EV/Forward EBITDA of 9.6x, representing a 1.0x standard deviation above the mean of 4-year EV/forward EBITDA band.

Risks to Our Call Higher-than-expected competition, regulation and currency fluctuations risks.

Conference call highlights

Expecting FY14 EBITDA annual growth to come in flattish vs. +1.8% target previously. The group’s 9MFY14 EBITDA dipped by 5.9% YoY to RM5.2b, as a result of the impact from Axis integration. Although management remains hopeful in recovering all its shortfall in 4Q14 (on the back of higher Celcom contribution that was driven by the recent completion in its IT transformation; and higher-cost efficiency achieved in XL), we are taking a more conservative view and expect the group’s EBITDA to record at RM7.0b (-3.7% YoY) due to the intense competition in both Malaysia and Indonesia, impact from the acquisition of Axis and foreign currency fluctuations, particularly IDR. Its FY14 revenue guidance, meanwhile, remains unchanged at a ‘mid-single digit’ despite the group recording merely 0.3% YoY growth in 9M14. Capex-wise, the group is expecting to accelerate its spending in 4Q14 (to reach RM4.4b by year-end) although its 9M14 capex merely stood at RM2.7b.

Celcom’s IT transformation has completed in October. Following the completion of its business support services (BSS) transformation (which allowed Celcom to improve its key transactions performance progress significantly), the group has successfully resumed its active path and reintroduces several new products/services since mid-October. Management believes its new products are ahead of the curve in view of the benefits delivered post the completion of BSS and could regain dealers’ as well as customers’ confidence with the enhanced network quality. To recap, Celcom has embarked on a massive two year IT transformation exercise in mid-2012, undertaking and spanning all touch points from dealers, customer care to retail outlets. This was aimed at ensuring better customer experience whilst establishing a platform for growth. Whilst upgrading the system, Celcom had faced some issues affecting customer service and dealer operations thus causing the group to lie low for the past 11 months with no product launches.

Source: Kenanga