Axiata’s 1Q16 results came in below expectations due to weak Celcom and Robi’s performance. No dividend was announced during the quarter, as expected. Despite the uninspiring 1Q16 result, management is keeping its FY16 KPIs unchanged. We, however, are less optimistic on the group’s outlook due to challenging performance at Celcom. Post-results review, we have reduced our FY16/17E earnings by 8.4/7.0% on: (i) lower Celcom turnover and margins assumptions, and (ii) higher depreciation expenses. Maintain MARKET PERFORM with lowered TP of RM5.81 (from RM6.15, previously) after rolling over our valuation base year to FY17E but with lower targeted EV/forward EBITDA of 7.1x (vs. 7.9x previously), representing - 2.0x SD below its 4-year mean.

Below expectation. Axiata’s 1Q16 core PATAMI of RM464m (-17% YoY) came in below expectation and accounted for 17.2% of our, and 18.2% of the street’s, full-year estimate (vs. the historical 23.8%-27.6% of full-year results for the past four financial years). The lower core PATAMI on a YoY basis was mainly due to weak Celcom (as a result of heightened competition, particularly in the postpaid and overseas foreign workers (OFW) segments) and Robi (due to heightened price competition and SIM bio-metric registration) performance but partially cushioned by the higher contribution of Smart, Dialog and forex translation gain.

No dividend was announced for the quarter. For the full financial year, we expect Axiata to declare 23.0 sen, translating into a dividend yield of 4.3%.

YoY, revenue improved by 5.4% to RM5.0b mainly driven by higher contribution from XL (higher voice and data revenue), Dialog (higher mobile, fixed and TV revenue) and Smart (higher data revenue). On a constant currency basis, the revenue growth rate would have decreased by 1.1%. Group EBITDA, meanwhile, improved by 7.7% to RM1.9b while margin enhanced marginally by 70bps to 37.4% as a result of the lower operating costs. Despite higher EBITDA, its normalized PATAMI dipped by 16.5% (or 20.1% at a constant currency basis) due to higher depreciation costs, net finance costs and lower share of profit from associates.

QoQ, turnover declined by 6.6%, no thanks to the slimmer contribution of Celcom, XL and Robi. At constant currency, group revenue was down 5.6%. EBITDA, meanwhile, weakened by 4.5% while its margin increased by 0.8 percentage points to 37.4%. Challenges continued at Celcom due to heightened competition, particularly in the postpaid and OFW segments, as well as a temporary halt in its valueadded services as a result of customer complaints on spam charges. On a YoY basis, Celcom’s revenue, normalised EBITDA and normalised PATAMI dipped by 13.4%, 12.3% and 22.3%, respectively. Celcom recorded a total of 175k negative subscriber’s net adds in 1Q16, reducing its total subscriber base to 12.0m. Despite the headwinds faced in 1Q16, Celcom cited that it has seen some early recovery sign following the introduction of new ‘dataled’ product bundles.

Outlook-wise, despite reporting a lukewarm 1Q16 result, management is maintaining its 2016 KPIs unchanged (target of 12.2%/16.0% YoY in revenue/EBITDA, respectively, based on 1USD=4.20). Note that, the FY16 KPI included the consolidation of NCell but excludes the Robi-Airtel merger. Its capex, meanwhile, is expected to stay at RM5.7b. Although management remains hopeful on Celcom recovery, we are taking a less optimistic view and believe the heightened competition coupled with the prolonged price war (which shows no sign of abating for now) are likely to cap Axiata upside moving forward. All in all, we expect Axiata to record 10.7% YoY/12.8% YoY in revenue/EBITDA growth for FY16.

Source: Kenanga Research - 26 May 2016