AXIATA : Maintain outperform at RM4.46, FV of RM5.52

Stable outlook for Axiata

Axiata Group Bhd
(Nov 16, RM4.44)
Maintain outperform at RM4.46, fair value RM5.52: We think Celcom may offer iPhones in the future, judging by the change in management’s tone. After making good progress in the big-screen business, management appears to be turning its attention to the small-screen.

The iPhone commands strong visibility and brand affinity, and should significantly enhance its smartphone portfolio. Apart from that, Celcom is adopting a wait-and-see approach on YTL Communications’ impending entry into the market.

Looking ahead, management believes competition in Indonesia will remain relatively stable, with the major mobile operators focused on maximising revenue from their subscriber base.  Earnings before interest, taxation, depreciation and amortisation (Ebitda) margins should remain stable at 50% as mobile penetration is now at about 80%, giving operators little incentive to engage in painful price wars to win over subscribers.

Further growth is expected to come from expanding its prepaid subscriber base, as well as boosting small-screen broadband usage.

As for India, the outlook is still challenging, despite the worst of the price war being over.

Earnings growth has been lacking, as margins have been trending marginally downward due to higher costs and losses from new service areas. The introduction of mobile number portability this month will only increase the intensity of the competition.

In Sri Lanka, Dialog’s recent 3QFY2010 results help reaffirm its return to profitability on the back of sequential revenue growth and narrowing losses in the broadband and TV businesses. The outlook looks quite positive, thanks to the floor pricing regime introduced on July 15 and should benefit Dialog the most as the market leader with 57% revenue market share.

Management is upbeat on Robi in Bangladesh, given that mobile penetration is low at 40% in a country with a population of 160 million. Hence, management is keen on generating rapid subscriber growth but earnings and margins may continue to fluctuate in FY2011 due to the SIM tax subsidy. We maintain our earnings forecasts but risks include: (i) weaker than expected performance by Celcom as well as from regional cellcos due to competition and macroeconomic factors such as inflation and so on; and (ii) over-priced acquisitions.

We maintian our sum-of-parts derived fair value at RM5.52 and “outperform” recommendation on the stock. We continue to like Axiata for its strong growth prospects from regional exposure and cheaper valuations against domestic peers. — RHB Research, Nov 16