Overall strong FY17 performance from all OpCos, but group’s profit was affected by widening losses in Idea. Moving forward, the group is set to remain focused on driving improvements at Celcom and XL as well as continuing its group-wide cost optimisation initiatives. Post review, we cut our FY18E earnings forecasts marginally by 11% and introduce our FY19E numbers. Maintain MARKET PERFORM call with unchanged SoP-derived TP of RM5.35.

Hit by Idea widening losses. FY17 core PATAMI of RM1.2b (-15% YoY) came in below expectations at 85% of our, and 92% of the street’s, full-year forecasts. The lower YoY performance was mainly due to widening losses from Idea (due to unprecedented and super-aggressive competition, leading to Idea contributing a loss of RM450m (vs. a profit of RM65m in FY16) to the group). On a reported basis, FY17 PATAMI advanced 80% YoY to RM909m as a result of improved EBITDA and forex translation gains in the current year as opposed to forex translation loss a year ago. As expected, the group declared a final dividend of 3.5 sen, bringing its fullyear DPS to 8.5 sen (vs. FY16: 8.0 sen), implying a dividend pay-out ratio of 64% (vs. 50% a year ago).

YoY, FY17 revenue advanced by 13%, thanks to higher contribution from all major OpCos, mainly driven by data segment growth with data revenue contributing 45.4% (vs. 34.3% in FY16) of service revenue. Group EBITDA, meanwhile, improved by 15%, in tandem with the top-line performance coupled with group-wide cost optimization efforts, with margin stable at 37.8%. QoQ, 4Q17 turnover improved by 1.0%, mainly underpinned by higher contribution from Celcom, Ncell and Robi. EBITDA, however, declined 6% attributed by subdued revenue growth and higher operational costs. Increase in tax charged and lower EBITDA resulted in core PATAMI declining by 40%. Celcom’s FY17 revenue contracted by 0.3% YoY owing to the lower legacy voice and SMS revenue. EBITDA inched higher by 0.6% YoY to RM2.3b with higher margin of 35.2% (vs. 34.8% a year ago) due to better cost control. QoQ, its revenue advanced by 4% (or 2.4% in service revenue) reflecting stability in operations, and ahead of industry performance. EBITDA, however, softened by 4% due to higher regulatory and operating costs. Improved balance sheet, where the group’s balance sheet continued to remain strong with a healthier cash balance at RM6.81b (vs. RM6.87b in 3Q17) with better gross debt/EBITDA ratio of 2.08x (3Q17: 2.10x and the optimal level of < 2.5x).

Introduced FY18 KPIs, where the group is targeting to achieve flattish revenue/EBITDA annual growth rates (based on Bloomberg estimate for 2018 forex at 1USD=RM3.90) or 6.3%/5.8% should we based on constant currency at 1USD=RM4.30. Its capex, however, was raised to RM7.4b (vs. RM6.2b in FY17) with key focus on strengthening its network in all OpCos.

edotco continued to perform. edotco, a 62.4% owned subsidiary, recorded sustained growth form expansion of its portfolio and higher tenancy ratio. The division accounted for 6.3% and 7.4% of the group’s total revenue and EBITDA, respectively, in FY17. It owns a total tower base of 16.5k across the region with 1.57x tenancy ratio (vs. 1.44x a year ago).

A significant technical impairment of c.RM1.2b-RM1.8b (which is a noncash and purely accounting adjustment) is set to arise post the proposed merger of Idea and Vodafone (which is targeted to be completed by 1H18). We have thus imputed a c.RM1.5b impairment loss into our FY18 model, resulting in a loss of RM142m at the reported PATAMI level.

Revised FY18E core PATAMI by 11%, after house-keeping adjustments and taking management’s latest guidance into consideration. Maintain MARKET PERFORM call with unchanged SoP-derived TP at RM5.35. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-thanexpected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 23 Feb 2018