We attended a post-results conference session organised by Axiata’s management yesterday and walked away with a CAUTIOUS view. Celcom is expected to embark on a more active path after the stabilisation of the Business Support System (BSS) issues and the group has scheduled to reintroduce several new products/services in 2H15 with limelight focused on product’s simplicity bundled with aggressive device plans. Although the aggressive handset strategy could dampen Celcom’s near-term margins it may lure subscriptions over the long-term. XL, meanwhile, is expected to post another lacklustre 2Q15 but to recover gradually in the 2H15. All in all, Axiata believes it will face a challenging time ahead to meet its 2015 KPIs. Post 1Q15 results review, we have lowered our FY15E/16E net profits by 0.9% each after fine-tuning. We reiterate our MARKET PERFORM rating on Axiata but with a lower target price of RM6.77 (from RM6.82 previously), based on unchanged targeted FY15 EV/forward EBITDA of 9.7x (+1.0x SD above its 4-year mean).

Challenging FY15 KPIs. Axiata believes it would face a challenging time ahead to meet its 2015 KPIs (target of 4% annual growth rate for both revenue and EBITDA) following a lukewarm 1Q15 results (revenue: +5.2% YoY but +2.3% at constant currency; EBITDA: -2.7% YoY and -5.4% at constant currency). In view of the BSS issues in Celcom coupled with XL’s transformation plan, the group believes its 1H15 results will be under pressure, but recovery is seen in the 2H15 when these issues stabilise. Celcom – firing on all cylinders in 2H15. With the BSS issues (i.e. network interface and data migration) about to stabilise, Celcom is now focused on revitalizing trade channels, moving to non-traditional channels, and optimising product offerings. New products/packages offering will be very much focused on simplicity (in contrast to its peers) and bundling with aggressive device's plans. The group, meanwhile, is also eyeing for exclusive partnership with OTT players and targeted to launch OTT VOD services in the 2H15. Following the launch of its new postpaid package, FIRST Basic 38, in early April, the group intends to introduce new prepaid plans in June to regain its momentum. Despite Celcom not elaborating further on its new prepaid plan, we understand that the group intends to focus on the students and foreign workers market for this segment.

Celcom’s near-term margins could come under pressure due to an aggressive handset strategy. Apart of the usual bundle plans, the group is also collaborating with Xiaomi, Samsung, Huawei and Apple to allow subscribers to trade-in their old devices as well as to provide rent-to-own service soon. While we believe the adoption of an aggressive handset strategy could draw subscribers’ attentions and lure subscriptions moving forward, it could dampen its margins over the short-term. Celcom’s reported EBITDA margin has declined to 37.1% in 1Q15 from 39.7% in the preceding quarter as a result of the higher devices' sale. On the normalised EBITDA over service revenue basis, Celcom’s EBITDA margin has weakened by 140bps QoQ to 44.5% in 1Q15 vs. 45.9% in 4Q14.

XL – expects a lacklustre 2Q but to recover gradually in the 2H15. The recent change in XL’s business strategy (from the high subscribers’ growth model to the profitability centric model) is expected to lead the group in its transformation journey in the 2Q15 before delivering some improvements in the 2H15. Axiata, being the major shareholder of XL, indicated that it will evaluate the latter’s transformation plan based on the: (i) financial performance (i.e. revenue & margins), and (ii) leading indicators (i.e. churn, ARPU, net adds and etc.). To recap XL’s transformation period is expected to last three years under three waves. First, to repair the core in 2015 with limelight focused 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 year 2017 and beyond. 

Source: Kenanga Research - 21 May 2015