AmWatch - Axiata Group : Shifting from volume to value BUY, 2 Apr 2015

STOCK FOCUS OF THE DAY

Axiata Group : Shifting from volume to value      BUY

We maintain BUY on Axiata at an unchanged fair value of RM7.90/share after attending a meeting with Axiata/Celcom/XL’s key management earlier this week. XL is now shifting its focus on profitability (vs. volume and subscriber growth previously). The 3-phase strategy from FY15F-17F (and beyond) involves product revamps and re-pricing, realignment of sales channels and a dual brand strategy.

Starter pack discounts are being rolled back while rates are likely to be adjusted upwards. The weeding out of low value subscribers in the process however, will have a short-term revenue impact in 1H15 before recovering in 2H15. Previous revenue guidance could be revised lower but this is a one-off impact for a structurally improved business model focusing on higher ARPU subscribers and lower subscriber acquisition cost in the mid-to-long term.

Management is attempting to position the XL brand in the mid-to-high end market while retaining the Axis brand for the lower segment. Axis is better positioned to deal with irrationalities in the industry without excessively affecting XL’s value proposition. The silver lining from the exit of low yielding subscribers is the freeing up of valuable capacity – XL’s 3G network utilisation could fall below 50% – which means previously planned capex of IDR7tril for FY15F could also be brought substantially lower.  In Malaysia, Celcom should soon be ready to launch tactical offerings after having been absent for over a year.

Despite the brief restructuring impact at XL, Axiata is broadly on the verge of earnings recovery. Share price has underperformed in the past 12 months; its valuations are most compelling among celcos and is best positioned for a dividend surprise (low net debt to EBITDA of 1.5x and capex revision at XL).

Others :

Plantation Sector : From an implied MV/ha perspective NEUTRAL

Economic Update : Moderate expansion during the start of 2015

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