Axiata Group - Beating industry growth amid stiff competition BUY

- We re-affirm our BUY rating on Axiata with an unchanged fair value of RM6.70/share following its 3Q12 results yesterday. Core earnings were at RM730mil for 3Q12, bringing the 9M12 total to RM2.1bil. This is within our estimates and at the higher end of consensus, accounting for 74% and 79% of FY12F, respectively.

- Normalised EBITDA margin slipped 1.8ppts QoQ to 42.2%, dragged mainly by XL. However, the group looks well on track to exceed its FY12 KPI of 5% revenue growth target for FY12 (9M12 revenue: +9% vs. Maxis: +2% and DiGi: +7%). 

- Celcom: EBITDA margin improved QoQ (+0.4ppt) as sales and marketing expenses fell due to better co-ordination of segmental marketing drives based on identified demarcation. Voice revenue grew 3% QoQ vs. Maxis (+0.6%). Postpaid ARPU declined (-2% QoQ) along with a decline in MoUs (-8% QoQ), but prepaid ARPU improved (+3% QoQ). Blended ARPU remained stable at RM51. 

- Management re-iterated that it does not intend to participate in the price war initiated by Maxis. Celcom’s micro granular approach in strategising the types of bundling and marketing approach for different market segments have enabled it to maintain a strong revenue growth and maintain subs growth and usage despite stiff price competition in the industry.

- XL: Margins were negatively affected by strong growth in data revenue (+60% YoY). There has been aggressive pricing in the market and XL lagged behind, leading to a net 8% churn in subs in 3Q12. Margins were also negatively affected by SMS interconnect (XL has a net-out position currently) which started in June 2012.

- IDR9-10tril capex for FY12F has been accelerated from 2013 allocations. While there is room to lower capex for FY13, this depends largely on data demand. Increasing adoption of smartphones, supported by gradual reduction in device pricing, is key to underpinning this trend.

- On a group-wide basis, management conservatively expects capex to remain at circa RM5bil next year but does not rule out a reduction (much of this hinges on XL’s requirements). The RM5bil capex includes expected capex for LTE (Celcom), for which the rollout is expected to be gradual.

- Axiata remains the cheapest local telco trading at 7x FY13F EV/EBITDA vs. Maxis and DiGi’s 11x-12x. Above-industry revenue growth, resilient margins and the abundance of room for an increase in dividend payout are strong share price catalysts. Potential M&A in the near term (utilising ready credit line of US$1.5bil) is another strong catalysts further out.  

Source: AmeSecurities