Axiata’s  FY13  core  results  were  in  line  with  both  our  and  consensus expectations.  Management  unveiled  its  2014  key  performance indicators (KPIs), which  we believe are not too conservative and reflect the short term challenges in  XL Axiata (XL),  the  dilution impact of  XL  -Axis’ merger, and a weak rupiah. Nonetheless, earnings are likely to see stronger growth in FY15. Maintain NEUTRAL on Axiata.

• Within  expectations.  Axiata’s  FY13  core  net  profit  of  MYR2,761m  (-0.8% y-o-y) was within our and consensus expectations, accounting for 104%  and  100%  of  the  full-year  estimates  respectively.  Note  that  the group’s  FY13  earnings  include  a  one-off  MYR100m  tax  writeback  at Celcom that was booked in 4Q.
• Weaker  q-o-q.  Q-o-q,  group  revenue  dipped  5.0%  (-1.1%  in  constant forex  terms)  due  to  weaker  sequential  growth  (-6%  to  +1%)  in  all  the operating companies (opcos),  as well as a  stronger MYR.  4Q EBITDA declined 12.6% q-o-q due to weaker EBITDA margins  across the opcos. Consequently,  Axiata’s  4Q core net profit  dropped 25.4%,  compounded by XL’s one-off MYR113m forex hedging gain in 3Q.
• Briefing  highlights.  Management  expects  to  spend  more  capex  in FY14,  driven  by  most  of  the  opcos  but  in  particular,  XL  (EXCL  IJ, Neutral, TP: IDR4,400). It expects to see low- to mid-single digit revenue growth for Celcom in 2014, and margins to remain stable. Competition in Bangladesh  has been relatively stable, while competitive intensity in Sri Lanka could ease due to a potential M&A.   
• Dividends. As expected, Axiata declared a final DPS of 14 sen, bringing its FY13 DPS to 22 sen (75% payout based on reported earnings). For FY14,  we  estimate  a  DPS  of  25  sen,  based  on  an  80%  payout.  This reflects its management’s progressive dividend payout policy.
• Forecasts. We introduce our FY15 numbers.   
• Investment case. We remain NEUTRAL on Axiata, with a revised SOPbased FV of MYR6.60 (previously MYR6.50) after updating our valuation parameters.

Briefing highlights
Outlook.  Management  unveiled  its  2014  key  performance  indicators  (KPIs),  which we  believe  are  not  too  conservative,  and  which  reflect  the  short  term  challenges faced by XL, the dilution impact of XL-Axis’ merger, and a weak rupiah. These factors indicate that FY14  earnings growth  will likely be flattish  at best.  We forecast FY14 core earnings to be marginally lower by 2.4%.

Management expects to spend more capex in FY14, driven by most of the opcos, but in  particular  XL.  For  FY14, it  is looking  to  spend  MYR4.4bn  (FY13:  MYR4.0bn)  as Celcom is expected to ramp up LTE coverage (1,500 LTE sites by year-end), while XL has carried forward some deferred capex from FY13.

Celcom. Management guided that Celcom is expected to see low- to mid-single digit revenue growth for 2014 (FY13: +3.7%). While management expects growth in data to remain the key revenue driver, we think the continued decline in SMS revenue  will continue to cap overall growth. We forecast Celcom’s FY14 revenue to grow by 3%.While Celcom’s operational trends remain decent,  we reiterate  our view that DiGi is the best  at  monetising data.  We estimate Celcom’s  FY13 data revenue rose  3.2%, which is higher than Maxis (+0.7%) but lags far behind DiGi (+17.0%).Management  expects  Celcom’s  EBITDA  margin  to  remain  stable  in  FY14  (FY13: 
44.2%).  However, we  see potential downside risk to margins if Maxis  spends more on marketing and turns up the competition, potentially prodding Celcom to respond in kind.  Note  that  Celcom’s  FY13  marketing  expenses  were  lower  (7.9%  as  a percentage of revenue vs 8.8% in FY12), which suggests  some potential upside. We forecast Celcom’s EBITDA margin to remain somewhat stable at 44% in FY14.

Dialog  Axiata.  Management  indicated  that  competition  has  been  relatively  stable, and the possible acquisition of Hutchison Telecommunications Lanka (Hutch Lanka) by Sri Lanka Telecom (SLTL SL, NR) suggests that competitive intensity in Sri Lanka is likely to ease going forward. Sri Lanka Telecom’s mobile subsidiary,  Mobitel,  is the second  largest mobile player after Dialog  Axiata (DIAL SL, NR), while Hutch Lanka  is the fifth and smallest mobile player in  that country. Management expects Dialog to  post  high single-digit revenue growth in FY14 (FY13: +12%).

Robi.  Management indicated that competition in Robi  also  remains stable. In fact,  it expects Robi to be the  fastest growing opco, chalking up revenue growth in the  high single-digits  to  low  teens  in  FY14  (FY13:  +16%).  EBITDA  margins  should  remain stable as well (FY13: 36.2%).

Risks
The  risks  include:  i)  lower-than-expected  subscriber  net  adds;  ii)  worse-thanexpected voice tariffs; and iii) intense competition.

Forecasts
We introduce our FY15 numbers.

Valuation and recommendation

We  remain  NEUTRAL  on  Axiata,  with  a  revised  SOP-based  FV  of  MYR6.60 (previously  MYR6.50)  on  updating  our  valuation  parameters.  The  group’s  FY14 earnings  growth  outlook  remains  cloudy  due  to:  i)  XL’s  slow  recovery;  and  ii)  the latter’s earnings dilution following its acquisition of Axis. Nonetheless, we expect to see a meaningful recovery for the group in FY15, spurred by yield management at XL and price optimisation strategies, together with meaningful integration benefits from the latter’s merger with Axis.

Financial Exhibits

SWOT Analysis

Company Profile

Axiata is one of the largest Asian telecommunication companies with controlling interests in mobile operators in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia.

Recommendation Chart

Source: RHB