Dialog’s 1QFY13 core results were somewhat below our and consensus expectations. Nonetheless, we believe Dialog’s performance should improve as usage levels should pick up going forward amid a competitive but stable environment. We maintain our earnings forecasts on Axiata pending its 1Q result tentatively on 22 May. Maintain Neutral on Axiata with SOP fair value of MYR6.40.

♦  Dialog off to a slow start.  Axiata’s 84%-subsidiary, Dialog Axiata (Dialog), posted 1Q13 core net profit of SLR1.2bn (-37.5% yoy), representing 18% and 19% of our and consensus full-year estimates respectively. The key variances were higher-than-expected sales & marketing and network costs, we believe.

♦  Steady 1Q. 1Q revenue increased 1.8% q-o-q, mainly driven by voice (+2% and data (+12%). 1Q EBITDA margin would have been flat q-o-q at 30% if not for the positive impact of the SLR429m TDC (Telecommunications Development Charge) refund. As Dialog’s 15-year tax holiday expired in 2012, Dialog reported a tax provision of SLR277m (taxation is based on 2% of revenue). 1Q core net profit however jumped 64.8% qoq primarily due to significantly lower depreciation.  

♦  Outlook.  According to Dialog, the competitive environment remains stable. Usage levels saw a marginal downtick due to seasonality, but should pick up going forward. Dialog was the first to launch LTE services in April based on the 1800Mhz spectrum and remains the only telecom operator to do so. While LTE-enabled handsets remain limited, Dialog has seen a few hundred subscribers already using LTE services. Apart from that, management expects finance costs to trend higher going forward to fund the expansion of LTE coverage.  

♦  Forecasts. Maintained pending Axiata’s 1Q result tentatively on 22 May.

♦  Investment case. Maintain Neutral on Axiata with unchanged SOP fair value of MYR6.40. Growth for Axiata looks challenging, but growing dividends will support the share price. An unexpected Myanmar license win and a quick turnaround in XL’s performance are re-rating catalysts.

Source: RHB