Period

2Q15/1H15

Actual vs. Expectations

Axiata’s 1H15 core PATAMI of RM1.1b (-9.0% YoY) came in within expectation and accounted for 49.4% of our, and 46.2% of the street’s, full-year estimate. Note that the 1H normally made up c.46%-53% of the full-year PATAMI, based on the past four-year financial performance.

Both Celcom and XL have shown some early signs of progress in 1H15, but the results were offset by the higher operating costs, thus narrowing the EBITDA margin to 37.5% (vs. 41.9% in1H14) and 36.2% (vs. 38.4%), respectively.

Dividends

Declared 8.0 sen dividend (1H14: 8.0 sen).

Key Results Highlights

YoY, 1H revenue although mainly driven by higher contribution from Dialog (mobile and television), Robi (data and device sales) and Smart (voice and data) declined by 2.3%. On a constant currency basis, the revenue growth rate would have declined by 0.7%. Group EBITDA, meanwhile, weakened by 2.1% to RM3.5b while margin dipped by 170bps to 36.5% as a result of the lower performance in Celcom (higher network and materials costs) and XL (higher network costs arising from Axis integration, and higher tower leasing cost post tower sale in December 2014).

QoQ, the turnover declined by 0.9%, no thanks to the slimmer contribution from Celcom. At constant currency, group revenue was down by 0.7%. EBITDA, meanwhile, weakened by 1.5% while its margin was relatively stable at 36.4%.

Celcom’s IT transformation issues have been predominantly resolved and gradually regaining trade confidence. Followed several new product launchings, Celcom managed to lure a total 61k subscribers' net adds in 2Q15, bringing its total subscribers to 12.3m. Blended ARPU was lowered by RM1 to RM45 as a result of the products’ pricing cannibalization. Its reported EBITDA, meanwhile, declined by 6.6% to RM663m (in tandem with the lower revenue (-6.4% QoQ) recorded in 2Q15) with margin (over service revenue basis) lowered to 39.6% vs. 40.9% in 1Q15.

Outlook

After reporting a lukewarm set of 1H15 results (revenue: +2.3% but -0.7% at the constant currency level; EBITDA: - 2.1% YoY and -5.0% at the constant currency level), management believes it would face a challenging time ahead to meet its 2015 KPIs (a target of 4% annual growth for both the revenue and EBITDA). Its capex, meanwhile, is expected at RM4.8b (FY14: RM4.0b).

Change to Forecasts

Post-results, we have marginally raised our FY15/FY16E PATAMIs by 1.6%/2.4% after fine-tuning.

Rating

Maintain MARKET PERFORM

Valuation

Lowered our Axiata’s TP to RM6.05 (from RM6.55 previously) given that the market appears to be undergoing a de-rating process as a result of the challenging macro and currency outlook. Our renewed TP is based on a lower targeted FY16 EV/fwd EBITDA of 8.6x (from 9.2x previously), representing a 4-year average (as opposed to +0.5x above its 4-year mean previously).

Risks to Our Call

Higher-than-expected competition, regulation and currency fluctuations risks.

Source: Kenanga Research - 21 Aug 2015