Dialog’s 1QFY14 core results were somewhat below our and consensus expectations. The increase  in  tax on voice calls  had negatively affected voice, while competition remains intense, in particular for data. We keep our earnings forecasts on  Axiata  pending its  1Q results  tentatively on 28 May. Maintain Neutral on Axiata with SOP fair value of MYR6.60.

• Muted start for Dialog.  Axiata’s 84%-subsidiary, Dialog Axiata (Dialog), posted  1Q14  core  net  profit  of  SLR969bn  (-19.5%  yoy),  representing 16% and 15% of our and consensus full-year estimates respectively. The key variances were higher-than-expected network costs, we believe.
• Flat 1Q14.  1Q revenue was relatively flat (+0.2 q-o-q), as growth in data (+10%) was offset by weak voice performance following an increase  in a tax on voice calls (that has been raised to 25% from 20%), mainly due to lower  bad debt  provisions.  1Q  EBITDA  margin  improved marginally  by 50bps to 29%.  1Q  core net profit,  however,  jumped 24.9% q-o-q,  mainly due to lower depreciation.
• Outlook.  Competition  remains  fairly  intense,  particularly  for  data.  This implies  it  may  be  increasingly  difficult  to  keep  margins  stable  if  price competition  in  data  worsens.  Nonetheless,  data  currently  contributes only about 10% of Dialog’s revenue.  On a more positive note, we note increasing  take-up for its e-payment platform (eZ Cash),  where  1.5m of Dialog’s  9.2m  subscribers  have  signed  up.  We  think  this  could  grow much further on the back of Dialog’s partnership with Etisalat (3rdlargest mobile operator with 4.5m subscribers),  which  we  think  will  significantly expand  the  addressable  market  and  stimulate  adoption  of  the  service. We note, however, that Dialog’s e-payment business is not yet profitable:though this is not too surprising, as it was only launched in 2012.   
• Forecasts. Maintained pending Axiata’s results due on 28 May.
• Investment case. We maintain NEUTRAL  on Axiata with an unchanged SOP-based  FV  of  RM6.60.  Axiata’s  FY14  earnings  growth  outlook remains cloudy due to: i) XL’s  (EXCL IJ, NEUTRAL, TP: IDR4,400) slow recovery, and ii) XL’s earnings dilution following its acquisition of Axis. We expect to see meaningful earnings recovery for Axiata only in FY15.

Source: RHB