We attended a dialogue session organised by Axiata’s CEO and CFO yesterday and walked away with a CAUTIOUS view. The group has officially introduced XL’s new management team, which will be headed by Ms. Dian Siswarini with effective from 1-April. XL also unveiled its 3-year business transformation journey by shifting its focus to profitability-centric (from the high subscribers’ growth model previously), which management believes will have a shortterm negative impact to its top-line and EBITDA. The prolonged Celcom’s IT transformation issue, meanwhile, is expected to be resolved by end-1H15 following a series of efforts being taken by the management. These latest developments could lead to Axiata’s FY15 KPIs kept in check in the coming quarters. Post-visit, there is no change in our earnings estimates as we had adopted a more conservative view in our earlier forecasts (FY15 annual revenue growth rate of 3.9% vs. 5.5% consensus’ estimate & EBITDA growth of 3.4% vs. 4.5%). We reiterate our MARKET PERFORM rating on Axiata with an unchanged target price of RM6.82, based on a targeted FY15 EV/forward EBITDA of 9.7x (+1.0x SD above its 4-year mean).

Challenging FY15 KPIs. Axiata is expecting to face various challenges in the 1H15 following the new business strategy plan launched by XL and prolonged IT transformation issue faced by Celcom. The group believes its 1H15 results could be under pressure but expect to recover in the 2H15, although the outlook still remains challenging on a full-year basis. Thus, suggesting that Axiata may review its FY15 KPIs (4% YoY growth in both revenue and EBITDA) in the coming quarters. On XL front, the group is not expecting to achieve its revenue growth target (within or better than the industry average of 6.0%-6.5% YoY) but keeps its EBITDA target unchanged at mid-to-high 30s.

XL launched a new business strategy with focus shifted to the profitabilitycentric model (from the high subscribers’ growth model previously) following the formation of a new management team. The new business strategy will focus on the mid-to-high value subscribers (rather than the mass market by lowering prices aggressively) and to achieve higher profitability and increase shareholders’ value ultimately. Meanwhile, the group has also decided to implement a targeted customers approach through a dual band strategy with Axis focusing on the affordable segment while leveraging on the XL brand to cater for the mid-to-high-end market.

XL’s transformation period is expected to last 3-year under three waves. First, to repair the core in 2015 with limelight focus on revamping its product portfolio & pricing, stop the high subscribers gross adds game, realign traditional sales channels, and strengthening the management team. Secondly, to move up the value ladder in 2015-2016 by implementing dual brand strategy, channel transformation moving towards modern channels; and digitalise its business operation. Thirdly, to create long-term value through adjacent new businesses in a year 2017 and beyond. All in all, XL believes the new business strategy will have a short-term negative impact to its top-line and EBITDA given there is a risk of cannibalisation of revenue from existing subscribers and higher churn rate.

Celcom is targeting to resolve its IT transformation issue by end-1H15. Despite Celcom already completed the bulk of its IT transformation, it is still facing two main issues in the BSS (business support services), namely network interface (i.e. unable to ‘talk’ with other telecommunications network equipment) and data migration (i.e. data corruption when migrating customers' data). The group is currently taking an aggressive approach to resolve the issues and has received encouraging outcome thus far. Moving forward, Celcom is planning to revamp its products by providing more simplified features in contrast to its peers, which the group deemed is more fitting under the current market dynamics. Meanwhile, we also understand that Celcom plans to further strengthen its sales and distribution network and introduce more modern trade facilities (i.e. Internet trading).

Source: Kenanga