PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts /B r ief ing N o t e
31 May 2010
MARKET DATELINE

Axiata Group Share Price

Fair Value
:
:
RM3.69
RM4.53
Improvements Gaining Momentum Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (AXIATA; Code: 6888) Bloomberg: AXIATA MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 13,105.1 1,652.7 21.6 18.4 27.8 20.0 - 3.2 0.57 9.6 0.0
2010f 14,698.1 2,087.3 24.7 24.7 34.0 14.9 23.4 2.7 0.42 10.9 0.0
2011f 16,094.4 2,410.2 28.5 28.5 15.5 12.9 26.5 2.2 0.28 11.2 0.0
2012f 17,208.8 2,470.0 29.2 29.2 2.5 12.6 34.8 1.9 0.15 10.3 2.7
Main Market Listing / Non- Trustee Stock / Syariah-Approved Stock By The SC # Excluding EI * Consensus Based On IBES Estimates

♦ In line. 1QFY10 core net profit of RM594.5m accounted for 28.5% of our
RHBRI Vs.
Above
Consensus

and 29.8% of consensus full-year estimates respectively. However, we

In Line
consider the results to be within expectations as the group’s 1Q effective Below
tax rate (ex-EI) stood at a low 21.4% (vs. our full-year assumption of
32%) and this tends to fluctuate, as witnessed in the previous quarters. Issued Capital (m shares) 8,445.2
Market Cap (RMm) 31,162.6
♦ Strong YoY improvement all round. Group revenue rose by 33.0% yoy Daily Trading Vol (m shs) 11.6
to RM3,812.7m due to stronger contribution from all main subsidiaries, 52wk Price Range (RM) 2.13 – 4.05
especially, Celcom (+15.2%), XL (+74.3% in RM terms), Dialog (+8.3% in Major Shareholders: (%)
Khazanah Nasional 44.5
RM terms), and Robi (+25.4% in RM terms). Operational improvements
EPF 16.4
aside, the strong yoy revenue growth was also partly due to the stronger
Amanah Saham B’putra 7.2
rupiah. 1Q10 reported EBITDA rose by 73.3% to RM1,927.9m, mainly due
to: 1) margin expansion at Dialog and XL; 2) cost management FYE Dec FY10 FY11 FY12
programme that boosted profitability; and 3) RM307.5m one-off gain EPS chg (%) - - -
arising from the selldown of XL shares, excluding which, yoy EBITDA Var to Cons (%) 5.8 7.8 (16.0)

growth would have been 42.5%.

PE Band Chart

♦ Briefing highlights. For Idea, management mentioned that no writedown

was required at this juncture. Management will continue to monitor and PER = 20x
assess the carrying value on a quarterly basis. For Celcom, management PER = 15x
PER = 10x
highlighted that Celcom’s FY10 EBITDA margin will likely to moderate to
mid-40’s region in the coming quarters due to higher marketing expenses
(to boost mobile broadband subscribers), partly cushioned by continuous
cost saving initiatives. Finally, while annualised 1Q revenue and EBITDA
growth of 16.4% and 15.2% have surpassed headline KPIs, management
Relative Performance To FBM KLCI
is keeping the KPIs unchanged for now.

♦ Risks. The risks include: 1) weaker-than-expected performance by Celcom

as well as from regional cellcos due to, among others, competition as well Axiata Group
as macroeconomic factors (inflation, etc); and 2) over-priced acquisitions.

♦ Forecasts. Maintained. FBM KLCI

♦ Investment case. We are keeping our SOP-derived fair value at RM4.53

and Outperform recommendation on the stock. We continue to like Axiata
for its strong earnings growth and exposure to the recovery in emerging
markets where mobile penetration rates remain low. Maintain Chye Wen Fei
(603) 9280 2172
Outperform.
chye.wen.fei@rhb.com.my

Please read important disclosures at the end of this report. David Chong, CFA
(603) 92802186
david.chong@rhb.com.my

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 31 May 2010

1QFY12/10 Results Review

♦ In line. 1QFY10 reported core net profit of RM594.5m accounted for 28.5% of our and 29.8% of the full-year
market consensus respectively. However, we consider this within expectations, as the group’s 1Q effective tax rate
(ex-EI) stood at a low 21.4% (vs. our full-year assumption of 32%) and this tends to fluctuate, as witnessed in the
previous quarters.

♦ Strong YoY improvement all around. Group revenue rose by 33.0% yoy to RM3,812.7m due to stronger
contribution from all main subsidiaries, especially, Celcom (+15.2%), XL (+74.3% in RM terms), Dialog (+8.3% in
RM terms), and Robi (+25.4% in RM terms). Operational improvements aside, the strong yoy revenue growth was
also partly due to the stronger Rupiah. 1Q10 reported EBITDA rose by 73.3% to RM1,927.9m, mainly due to: 1)
margin expansion at Dialog and XL; 2) cost management programme that boosted profitability; and 3) RM307.5m
one-off gain arising from the selldown of XL shares, excluding which, yoy EBITDA growth would have been 42.5%.

♦ Celcom. Celcom’s 1Q10 net profit of RM441m came in within our expectation, accounting for 24.9% of our full-year
estimates. 1Q10 revenue grew 0.2% qoq to RM1,703m due to a 14.7% qoq increase in mobile broadband revenue
that more than offset: 1) lower MOU (on seasonal factors) and; 2) ARPU (arising from various promotional offerings
at lower prices that brought down ARPU). Total subscriptions (ex-broadband subscribers) increased by 112k qoq as
postpaid subscriptions continue to be affected by Celcom’s off cleaning up exercise. Meanwhile, mobile broadband
net adds rose to 124k (4Q09: 36k) as Celcom had started to intensify its marketing efforts in promoting mobile
broadband since Jan 10 (recall, Celcom scaled back its marketing activities to address network congestion issues in
end-FY09). We also note that Celcom’s qoq revenue growth and net adds were weaker than Digi’s, but we believe
this is still early to tell if the trend has reversed. Stripping out lumpy charges of RM24.4m (including additional USP
charges of RM7.4m, ESOS of RM3.4m and salaries and wages of RM13.6m), Celcom’s normalised EBITDA margin
expanded by 2.7%-pts qoq to 47.4% in 1Q10 mainly due to lower operating costs (-1% qoq) on continuous cost
saving initiatives and initiatives on bad debt management through credit management and auto debit.

Briefing Highlights

♦ Idea – No need for capital injection or provision for impairment for now. Management said that Idea does
not require capital injection to fund the 3G spectrum cost of US$1.28bn in India as this could be met by raising
debt. In addition, management also mentioned that it does not need to writedown its investment in Idea at this
juncture. However, management will continue to assess Idea’s carrying value on a quarterly basis and impairment
will be made when needed.

♦ Celcom – EBITDA margin to moderate in coming quarters. Management highlighted that Celcom’s FY10
EBITDA margin will likely to moderate to mid-40’s region (from 47.4% in 1Q10, excluding additional USP charges of
RM7.4m, ESOS of RM3.4m and salaries and wages of RM13.6m) in the coming quarters due to higher marketing
expenses (to boost mobile broadband subscribers), partly cushioned by continuous cost saving initiatives.

♦ Robi (formerly AxB). Management is positive on both Robi’s revenue growth (1Q10: +35%) and EBITDA margin
(1Q10: 26%), given: 1) the country’s high population and low penetration rate, which suggest ample potential for
mobile subscriber growth there; and 2) management is confident that it would be able to take market share from
its major competitor, given continuous efforts to improve its distribution, customer service and network quality.
Thus far, the impact of Bharti’s entrance has been rather muted given that Bharti was facing some hiccups there.

♦ KPI & capex. Although annualised revenue and EBITDA growth of 16.4% and 15.2% have surpassed its headline
KPIs (revenue growth: 12.1%; EBITDA growth: 14.1%), management is keeping the KPIs unchanged for now as:
1) Robi will continue to focus on subscriber acquisition and invest in new services, which may result in higher
operating costs, hence impacting Axiata’s overall EBITDA growth; and 2) Competition may intensify in the coming
quarters, as all major mobile players are currently expanding their network. Nevertheless, management said these
KPIs would be revisited in 2H. As for capex, management kept to its total capex guidance of RM3.6bn for FY10, of
which RM2bn is allocated for XL, and RM1bn is allocated to Celcom.

♦ To announce dividend policy in 3Q10. With improving performance from most of its subsidiaries and net
debt/EBITDA stood at 1.4x as at end-1Q10 (excluding RM1.7bn disposal proceeds on XL shares that only came in
on 2 Apr 10), management said they are still in the midst of formulating a dividend policy and this could be
announced in 3Q10.

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Risks

♦ Risks to our view. The risks include: 1) weaker-than-expected performance by Celcom as well as from regional
cellcos due to, among others, competition as well as macroeconomic factors (inflation, etc); and 2) over-priced
acquisitions.

Forecasts

♦ Earnings forecasts. Unchanged.

Valuations And Recommendation

♦ Outperform recommendation reiterated. We are keeping our SOP-derived fair value at RM4.53 and
Outperform recommendation on the stock. We continue to like Axiata for its strong earnings growth and exposure
to the recovery in emerging markets where mobile penetration rates remain low. Maintain Outperform.

Table 2 : Earnings review

QoQ YoY
FYE Dec (RMm) 1Q09 4Q09 1Q10 (%) (%) Comments
2,866.8 3,693.8 3,812.7 3.2 33.0
Revenue YoY improvement mainly driven by stronger contribution
from Celcom, XL, Dialog and Robi.

1,112.2 1,664.2 1,927.9 15.8 73.3

EBITDA Boosted by: 1) stronger operations at Celcom, XL and
Dialog; and 2) RM307.5m gain from the selldown of XL.
(585.0) (797.4) (678.6) (14.9) 16.0
Dep/Amor Lower qoq on higher depreciation charges in Celcom and
Dialog in 4Q09.

EBIT 527.2 866.8 1,249.3 44.1 >100

Finance income 33.8 24.9 18.5 (25.6) (45.3)
Finance cost (264.5) (180.4) (174.6) (3.2) (34.0)
Total debt as at 31 Mar 10 was RM12bn (4Q09: RM12.3bn;
1Q09: RM19bn).
Forex gains/(loss) (216.2) 86.7 70.3 (18.9) >100
Jointly controlled (27.9) (17.3) 31.3 >100 >100
entities
Assoc 34.7 47.2 22.7 (52.0) (34.6)
EI 104.1 0.0 0.0 nm (100.0)
191.2 827.9 1,217.4 47.0 >100
Pre-tax profit
(141.4) (225.3) (260.8) 15.7 84.4
Tax
14.1 (44.1) (35.2) (20.2) >100
Minority interest
63.9 558.6 921.5 65.0 >100
Net profit
130.7 522.3 594.5 13.8 >100
Core profit Exclude: 1) RM307.5 one-off gain from sale of XL; 2)
Accelerated depreciation charge of RM5m; and 3) RM14m
forex gain.

Margins (%)
38.8 45.1 50.6
EBITDA
18.4 23.5 32.8
EBIT
6.7 22.4 31.9
Pre-tax
73.9 27.2 22.7
Effective tax rate
4.6 14.1 15.6
Normalised core profit
Source: Company, RHBRI

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Table 3 : Celcom’s Key Operating Statistics

FYE Dec 1Q09 4Q09 1Q10 qoq yoy Comments
(%) (%)
Subscribers (‘000)
7,228 7,847 7,977 1.7 10.4
- prepaid
1,642 1,787 1,769 (1.0) 7.7
- postpaid
8,870 9,634 9,746 1.2 9.9
- Total Improved yoy on

Net adds (‘000)

232 (16) 130 >100 (44.0)
- prepaid
105 (17) (18) 5.9 >100
- postpaid
337 (33) 112 >100 (66.8)
- Blended

ARPU (RM)
41 43 42 (2.3) 2.4
- prepaid Improved qoq largely due to stronger usage as a result of the year-
end festivities.
104 91 95 4.4 (8.7)
- postpaid Stronger rpms helped lift ARPUs.
53 52 52 (0.5) (2.0)
- Blended

AMPU
139 148 147 (0.7) 5.8
- prepaid
438 419 386 (7.9) (11.9)
- postpaid Contracted due to seasonality.

Broadband
306 511 635 24.3 >100
Subs (‘000)
78 36 124 >100 59.0
Net adds (‘000) Growth slowed in 4Q09 as network congestion issues caused Celcom
to scale back on A&P activities.
73 75 74 (1.3) 1.4
ARPU (RM)
Source: Company, RHBRI

Table 4: Valuation
Value Value/share Comments
RMm RM

26,815.9 3.18
Celcom DCF based on WACC = 9.9%
7,556.1 0.89
Excelcomindo 68.5% stake @ EV/EBITDA of 6x
1,743.4 0.21
Dialog 84.8% stake at market price
1,094.2 0.13
Robi 70% stake @ EV/EBITDA of 8x
914.3 0.11
SunShare (M1) 29.7% stake at market price less net debt of SunShare
2,531.0 0.30
Idea 19% stake @ consensus median target price
353.9 0.04
Others Relates to Samart Corp, Samart I-Mobile and TMIC
41,008.8 4.86
Firm value
2,235.0 0.26
Add: Cash Holding company level cash as at end-2009 plus RM1,865m
proceeds from recent XL stake selldown
(5,000.0) (0.59)
Less: Debt Holding company level debt as at end-2009
38,243.8 4.53
Equity Value

Source: RHBRI

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Table 5 : Earnings Forecasts Table 6 : Forecast Assumptions

FYE Dec (RMm) FY09A FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 13,105.1 14,698.1 16,094.4 17,208.8 Celcom rev gwth (%) 11.5 8.5 5.9
Turnover growth (%) 15.5 12.2 9.5 6.9 Celcom EBITDA margin (%) 44.3 44.5 44.9
XL rev gwth (%) 20.2 9.2 10.8
EBITDA 5,624.3 6,453.2 7,090.1 7,663.4 XL EBITDA margin (%) 48.0 48.0 48.0
EBITDA margin (%) 42.9 43.9 44.1 44.5 Dialog rev gwth (%) 9.4 10.7 8.5
Dialog EBITDA margin (%) 30.7 31.5 31.8
Dep. & amort. (2,860.3) (2,565.5) (2,788.9) (2,999.1)
Capex (RMm) 4,128 3,645 3,561
EBIT 2,764.0 3,887.7 4,301.2 4,664.3
EBIT margin (%) 21.1 26.5 26.7 27.1
Net interest expense (199.1) (598.4) (463.6) (561.2)
Forex gains/(losses) 587.2 - - -
Jointly controlled
(59.5) 91.6 114.7 1.0
entities
Associates 160.8 108.1 112.9 119.6

Pretax Profit 2,666.2 3,488.9 4,065.2 4,223.7

Tax (910.3) (1,116.5) (1,300.9) (1,351.6)
Minorities (103.2) (285.1) (354.2) (402.1)
Net Profit 1,652.7 2,087.3 2,410.2 2,470.0
Core Net Profit 1,413.7 2,087.3 2,410.2 2,470.0
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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