1QFY20 CNP of RM124.7m (-40%YoY) missed expectations, dragged by losses from its non-mobile segments. We believe the group could be threatened by the Covid-19 pandemic leading to subscriber loss from the lower income regions which could be more sensitive to slower economic activity. Meanwhile, benefits from its digital segment could take longer to materialise. This led us to slash our FY20E/FY21E earnings by 25%/27%. Downgrade to MP with a lower SoP-driven TP of RM3.85 (from RM4.50).

1QFY20 missed expectation. 1QFY20 core PATAMI of RM124.7m missed our/consensus expectations, merely making up 13%/11% of respective estimates. The negative deviation could be mostly attributed to the wider losses from non OpCo businesses. In comparison, total normalised earnings from regional OpCos saw flattish growth of 1%. No dividend was announced, as expected.

YoY, 3MFY20 revenue inched up to RM6.04b (+2%), mainly on the back of higher contributions from XL (+12%) and Robi (+10%)’s market share gains. This was, however, offset by Celcom’s (-7%) continued loss of postpaid and prepaid subscribers and Ncell (-11%) facing competitive ARPU dilution and network capacity constraints. Group EBITDA came at RM2.50b (+3%) coinciding with the marginally revenue, also supported by operational restructuring in spite of Celcom’s lower revenue. That said, core PATAMI registered a 40% decline to RM124.7m, dragged by losses from associates and the group’s digital businesses.

QoQ, 1QFY20’s revenue fell by 4% from softer contributions across all segments, save for XL and Robi. Similar to the above, EBITDA was lower (-8%) from the lower top-line while core PATAMI (-53%) was dragged by losses from the non-OpCos.

Navigating through choppy seas. Though the group has been successful in maintaining a sustainable top-line, we believe the Covid-19 pandemic poses new challenges for the group. With most ASEAN countries enforcing some forms of movement restrictions and facing economic disruptions, the loss of income could put a toll on the poorer regional markets. This could be even more prominent in markets with a higher prepaid and low ARPU mix (i.e. Indonesia, Sri Lanka, Bangladesh, Nepal). Locally, Celcom appears to be competitively challenged, having reported poorer subscriber numbers from product delays. Prepaid subscribers came at 5.04m; ARPU @ RM32 (1QFY19: 5.97m, ARPU: RM34) and postpaid subscribers was at 2.94m; ARPU @ RM85 (1QFY19:2.98, ARPU: RM84). That said, the group’s operational excellence initiatives could help cushion potential blows emanating from subscriber losses. On the flipside, the digital segment continues to struggle to achieve profitability. While the group had expressed intentions to further monetise or form more collaboration in this space, we opine that any such efforts could be on hold with the pandemic. Meanwhile, similar to its peers, management has withdrawn its guidance for FY20 as it reflects on the potential impact of the pandemic to its business environment, with cash preservation in mind. Past guidance include: (i) revenue growth of 3.5-4.5%, and (ii) EBITDA growth of 4.0-5.5%.

Post-results, we slash our FY20E/FY21E earnings by 25%/27%. In addition to widening our anticipated losses from the non-OpCo operations, we also apply more cautious assumptions to the overall regional numbers from the above.

Downgrade to MARKET PERFORMwith a lower SoP-driven TP of RM3.85 (from RM4.50, previously). Our SoP-driven TP implies a 4.8x FY21 EV/Fwd. EBITDA, which is 2SD below the 3-year average. Given the constant drag from the digital segment, cautious subscriber outlook and delay in the national 5G scene, investors might want to call it a day with the stock after it rebounded from a low of RM3.10. In line with the management’s aspiration to conserve cash, dividend payments could also be less generous in the coming periods.

Source: Kenanga Research - 22 May 2020