1Q18 results were below expectations due mainly to the 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/19E earnings forecasts marginally by 12%/7%. Maintain MARKET PERFORM call but with a lower SoP-derived TP of RM5.15.

Below expectations. 1Q18 core PATAMI of RM195m (-33% YoY) came in below expectations at 15% of our, and 14% of the street’s, full-year forecast. On our end, the key discrepancies were mainly due to higher- than-expected OPEX and widening Idea losses. The lower YoY performance was mainly due to Idea’s losses (-RM114m vs. –RM25m a year ago), startup investments in new businesses and lower contribution from Smart and Celcom. On a reported basis, 1Q18 PATAMI plunged 162% YoY to a loss of RM147m due mainly to dilution losses of RM357.6m in India (where Axiata did not participate in the preferential new shares issued in Idea) and lower associate and JV contribution.

YoY, 1Q18 revenue declined by 2%, no thanks to unfavourable forex translation impact arising from strengthened RM against its major OpCos currencies. EBITDA dropped 6% to RM2.0b with margin lowered to 35.4% (vs. 36.6% a year ago). QoQ, turnover weakened by 8%, mainly due to lower contribution from all OpCos other than Celcom. EBITDA declined by 12%, attributable to lower revenue and higher OPEX. PATAMI declined more than 100% to a loss of RM195m as a result of the loss in dilution of its investment in India. The group’s balance sheet, meanwhile, remained healthy with gross debt/EBITDA of 2.23x in 1Q18 (1Q17: 2.4x), partly impacted by lower EBITDA on forex translation.

Celcom’s 1Q18 revenue improved by 12% YoY underpinned by strong growth in data segment, which made up of 47% of the total revenue. Celcom’s strategies on continuing to focus on high-value customers, simplified product offerings as well as improved sales distribution have started to bear fruits in 1Q18 where the group’s subscriber base increased by 51k net adds to 9.6m (reversing from its declining trend since 4Q15) with both postpaid and prepaid ARPU improved YoY by RM6/RM4 to RM87/RM34, respectively. EBITDA, however, weakened by 14% due to the adoption of MFRS accountancy principle.

Maintained FY18 KPIs guidance but expects its flattish EBITDA growth target to be challenging in view of the higher forex volatility. Note that, the group is targeting to achieve flattish revenue/EBITDA annual growth rates (based on Bloomberg estimate for 2018 forex at 1USD=RM3.90) in FY18 or 6.3%/5.8% based on constant currency at 1USD=RM4.30. Its capex was maintained at RM7.4b 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 6.1% and 7.7% of the group’s total revenue and EBITDA, respectively, in 1Q18. It owns a total tower base of 16.8k across the region with 1.59x tenancy ratio (vs. 1.48x a year ago).

Lowered FY18E/FY19E core PATAMI by 12%/7%, after incorporating the tepid 1Q18 performance and revised our OPEX assumptions. Besides, we also understand that a significant technical impairment of c.RM1.2b- RM1.8b (which is a non-cash and purely accountancy adjustment) is set to arise post the proposed merger of Idea and Vodafone (which is targeted to be completed by 1H18). We have imputed a c.RM1.4b impairment loss into our FY18 model earlier, resulting in a loss of RM501m at the reported PATAMI level.

Maintain MARKET PERFORM call but with lower SoP-derived TP of RM5.15 vs. RM5.25 previously. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-than-expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 23 May 2018