Mobile fronts keeping up. Celcom faces steep competition in the local scene as consumers weigh in postpaid options from prepaid offerings. Nonetheless, management remains firm in managing operating costs better, mainly direct costs (i.e. network and maintenance costs), as demonstrated in recent 1H19 numbers which we believe could carry on to future results (1H19 service revenue: -4%, EBITDA: +34%). XL’s expansion into the ex-Java market could drive the group’s Indonesian presence while benefiting from improved interconnection and other expenses (possibly better roaming costs). Its 1H19 saw service revenue grow by 15% and EBITDA by 19%. We gathered that other players were unable to enter the ex-Java scene due to poorer financial capabilities, which says plenty about XL’s staying power in the fight for market share.

On other regions, Robi (Bangladesh) face pressures from new tax rulings but are in tow to stay profitable (prior to taxes) as growing market share is supplemented by easing opex. Dialog (Sri Lanka) may be hampered in FY19 owing to the terrorist attack but might chance a recovery in FY20 if consumer spending regains footing. Smart (Cambodia) thrives as a market leader. At the meantime, NCell’s (Nepal) ongoing capital gain tax dispute with authorities may still be distant from a resolution.

Towers sprouting. edotco’s outlook is helmed by its growing tower base, with Philippines being the next addition to its 2Q19 footprint of 19.7k towers. We believe other possible entries could be the untapped Thailand and Vietnam markets. Digital operations are likely making losses but seeking synergistic partnerships to expand presence.

Stay brazen. Management continues to champion operational excellence to promote profitability and growing its cash pile. The mix of topline performances from the above could translate to flattish numbers in the short-term but we opine that our expected 22% core earnings growth in FY20E is not unreasonable. Note that we did not account for any synergistic benefits from the merger with Telenor previously. While we are conservative on our dividend expectations (c.70-80% payout), we are hopeful that generous returns would keep investors sticky.

Upgrade to OUTPERFORM (from MARKET PERFORM) with an unchanged SoP-derived TP of RM4.80. Our TP implies a FY20E EV/Fwd. EBITDA of 5.6x, which is below the stocks 3-year mean by -1SD. Overall, we believe the sell-down could have been overdone as there is still value to be had from the traction seen in the stock’s underlying operations. Additionally, fresh talks of merger potentials could reignite sentiment on the stock. While its would-be Telenor counterpart DIGI’s (MP, TP: RM4.70) share price has returned close to its pre-talks cancellation levels, we believe the merits above hold for AXIATA to do the same.

Source: Kenanga Research - 1 Oct 2019