9M18 results came in with our, but below consensus, expectation. Moving forward, the group is set to remain focused on driving improvements on all Opcos as well as continuing its group-wide cost optimisation and capex management initiatives. Maintain earnings forecast for now, pending today’s briefing. Reiterate OUTPERFORM call with an unchanged SoP-derived TP of RM4.60.

In-line with our estimate, but below the consensus’. 9M18 core PATAMI of RM668m (-33% YoY) came in within our expectation (at 73.6%) but below the street’s (at 66.5%). No dividend was announced during the quarter, as expected. The lower YoY performance was mainly impacted by investments in new digital business; higher D&A charges (as a result from higher capex investment), tax credit in previous years as well as unfavourable forex. Its reported a LATAMI of RM3.3b in 9M18 due mainly to the one-off, non-cash provision of RM3.4b as a result of the de-recognition and reclassification of Idea from an “associate item” to a “simple investment” in 2Q18. Note that, our core PATAMI was derived after adding forex loss of RM112m, Idea’s share of losses of RM10m and loss on dilution/impairment of non-core digital assets of RM53m and removing RM20m of XL’s gain on disposal of assets as well as RM51m loss on dilution in Idea.

YoY, 9M18 revenue weakened by 3% to RM17.6b, no thanks to unfavourable forex translation impact arising from strengthened RM against its major OpCos’ operating currencies. EBITDA dropped 9.5% to RM6.2b with margin lowered to 35.5% (vs. 38.1% a year ago). At constant currency, revenue grew 6.4% driven by better performance from all major Opcos, while EBITDA remained stable. QoQ, turnover improved by 2%, thanks to higher contribution from all OpCos. EBITDA soared by 6.2%, attributable to higher revenue but offset by higher OPEX. PATAMI improved more than 100% to RM132m due to a write-back of RM51m (vs. RM3.4b one-off provision loss in 2Q18) on its investment in India. The group’s balance sheet, meanwhile, remained healthy with gross debt/EBITDA of 2.34x in 3Q18 (2Q18: 2.29x). In-line with internal guidelines, c.50% of RM19.5b debt was USD-denominated (of which c.50% were hedged); and 67% of debt was on fixed rate as of end-3Q18.

Celcom’s 9M18 revenue improved by 11% YoY underpinned by solid prepaid and device revenues. Celcom’s focus on high-value customers, simplified product offerings as well as improved sales distribution had performed well in 1H18 but started to show some weaknesses in 3Q18 with group’s subscriber base inverted to the declining trend to 9.2m (vs. marginal gain in the 1H18) after losing 447k (to 6.3m) prepaid subscribers. The thinner subscriber base has led to its revenue dropping marginally by 0.1% as a result of lower Prepaid ARPU (-RM1 to RM34) but partially offset by higher Postpaid ARPU of RM86 (+RM2). EBITDA, meanwhile, weakened by 1.4% due to higher operating costs.

Challenging FY18 KPIs. AXIATA is expected to perform below its FY18 KPIs (based on Bloomberg rate in January 2018 at 1 USD=RM3.90), where the group is aiming to achieve flattish revenue/EBITDA annual growth rates. The group, however, is expected to perform generally in line with the adjusted headline KPIs (2.8%/1.7% annual growth in revenue/EBITDA, respectively, based on constant currency (1USD=RM4.30), pre-MFRS basis; excluding Deodar), given its revenue/EBITDA have grown 4.2%/1.6% (to RM18.9m/RM8.0m), respectively, as of end-9M18.

Maintain OUTPERFORM call with an unchanged SoP-derived TP of RM4.60 for now pending on more details from its investors’ day today. All in, we are likely to take a more cautious view on Celcom (in view of its increasing operational outlook) coupled with unfavourable forex that may prompt us to review our TP.

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 - 26 Nov 2018