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Axiata Group Berhad : XL Continues To Improve - 03/08/2010

Axiata Group Berhad : XL Continues To Improve - 03/08/2010

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Published by Rhb Invest
♦ Beat expectations. XL’s 1HFY10 core net profit of Rp1,331.8bn (+283.6% yoy) came in above expectations, at 61.8% of our and 59.9% of the consensus full-year estimates. The variance against our forecast came largely from: 1) lower-than-expected infrastructure expenses; and 2) lower-than-expected finance costs.
♦ Beat expectations. XL’s 1HFY10 core net profit of Rp1,331.8bn (+283.6% yoy) came in above expectations, at 61.8% of our and 59.9% of the consensus full-year estimates. The variance against our forecast came largely from: 1) lower-than-expected infrastructure expenses; and 2) lower-than-expected finance costs.

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08/02/2010

Malaysia

PP 7767/09/2010(025354)

Corporate Highlights
Com pany Upda te

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

MARKET DATELINE

3 August 2010 Share Price Fair Value Recom : : : RM4.24 RM4.75 Outperform (Maintained)
Bloomberg: AXIATA MK EPS Growth# (%) 27.8 43.4 16.3 9.7 PER# (x) 23.0 16.0 13.8 12.6 C.EPS* (sen) 23.4 26.5 34.8

Axiata Group
XL Continues To Improve

Table 1 : Investment Statistics (AXIATA; Code: 6888) Net FYE Dec Turnover (RMm) 13,105.1 14,698.1 16,094.4 17,208.8 profit (RMm) 1,652.7 2,233.2 2,596.7 2,847.6 EPS (sen) 21.6 26.4 30.7 33.7 Core EPS# (sen) 18.4 26.4 30.7 33.7

P/NTA (x)
3.7 3.0 2.5 2.1

Net Gearing (x)
0.57 0.38 0.24 0.11

ROE (%)
9.6 11.6 12.0 11.7

GDY (%)
0.0 0.0 0.0 2.4

2009 2010f 2011f 2012f

Main Market Listing / Non- Trustee Stock / Syariah-Approved Stock By The SC

# Excluding EI

* Consensus Based On IBES

Beat expectations. XL’s 1HFY10 core net profit of Rp1,331.8bn (+283.6% yoy) came in above expectations, at 61.8% of our and 59.9% of the consensus full-year estimates. The variance against our forecast came largely from: 1) lower-than-expected infrastructure expenses; and 2) lower-than-expected finance costs. 2QFY10 EBITDA margin grew to 52.9%. 2QFY10 net revenue rose 28.8% yoy, driven mainly by the launch of several new promotional tariff plans, which led to both stronger voice (+23.0% yoy) and non-voice revenue (+49.0% yoy). Thanks to tight cost control management, EBITDA margin expanded by 9.5%-pts to 52.9% while EBITDA grew 57.7% yoy to Rp2,277.7bn. Added 2.6m subscribers in 2Q. XL added 2.6m subscribers during the quarter (1Q: +1.2m subs), which came mainly from the prepaid segment. Meanwhile, prepaid subscribers (both active and grace) rose by 43.6% yoy to 34.9m. FY10 guidance raised, and capex guidance maintained. Given the better set of performance and relatively stable competitive environment ahead, management raised its FY10 guidance for both revenue growth and EBITDA margin from 15% and mid-40’s to above 20% and ~50%. On the other hand, despite XL’s YTD total capex of Rp1,658bn accounting for only 33.2-36.8% of management’s full-year capex guidance of Rp4,5005,000 bn (and this was partly due to delay in equipment delivery), management is still keeping its capex guidance. To resume dividend in FY11. Given the improved earnings and balance sheet position (net debt/EBITDA declined to 1.3x from 3.5x a year ago), management expects to resume paying dividends from FY11, and a formal dividend policy will be announced by end-FY10. Risks. 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. We are raising our FY10-12 net profit forecasts for Axiata by 7.0-15.3% to RM2,233.3m, RM2,596.7m and RM2,847.6m respectively, largely to reflect an upward revision in our forecasts for both XL and Dialog post release of their 2QFY10 results. Investment case. SOP fair value is raised by 4.9% from RM4.53 to RM4.75 after: 1) updating our valuation parameters (e.g. latest market prices and exchange rates); and 2) rolling forward the base year from FY10 to FY11. Maintain Outperform.
Please read important disclosures at the end of this report.

Issued Capital (m shares) Market Cap (RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Khazanah Nasional EPF Skim Amanah Saham FYE Dec EPS chg (%) Var to Cons (%) PE Band Chart
PER = 20x PER = 15x PER = 10x

8,445.2 35,807.5 11.4 2.90 – 4.45 (%) 44.5 17.1 8.5 FY11 +7.7 16.2 FY12 +15.3 -3.2

FY10 +7.0 13.2

Relative Performance To FBM KLCI

Axiata Group

FBM KLCI

Chye Wen Fei (603) 9280 2172 chye.wen.fei@rhb.com.my
David Chong, CFA (603) 9280 2186 david.chong@rhb.com.my

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Page 1 of 4

3 August 2010

Table 2 : Earnings review of XL qoq FYE Dec (Rp bn) Revenue 2Q09 3,308 1Q10 4,106 2Q10 4,261 (%) 3.8 yoy (%) 28.8 1H FY09 6,211 1H FY10 8,368 YoY (%) 34.7 Comments Yoy lifted by: 1) larger subscriber base; 2) higher ARPU; and 3) higher revenue from other telecommunication services (i.e. leasing of towers). EBITDA Dep/Amort EBIT Net int exp 1,445 (921) 524 (320) 2,132 (963) 1,169 (211) 2,278 (963) 1,314 (205) 6.8 0.1 12.4 (3.0) 57.7 4.7 >100 (35.9) 2,548 (1,799) 749 (686) 4,410 (1,926) 2,483 (416) 73.1 7.1 >100 (39.3) Mainly due to: 1) higher topline; and 2) cost management initiatives. Higher yoy on the back of higher number of BTS. Total debt declined to Rp11.4trn as at 30 Jun 10 (1Q10: Rp13.1trn; 2Q09: Rp18.9trn). Forex Others Assoc Exceptional Pretax Tax MI Net profit Core net profit Margins (%) EBITDA EBIT Pretax ETR Net profit Core PAT 43.7 15.8 41.7 26.5 30.6 9.4 51.9 28.5 20.0 27.0 14.6 18.2 53.5 30.8 23.3 27.0 17.0 24.2 41.0 12.1 15.7 27.4 11.4 8.8 52.7 29.7 21.7 27.0 15.8 17.3 1,069 106 0 0 1,378 (366) 0 1,012 61 (60) (78) 0 0 820 (221) 0 598 598 (37) (79) 0 0 994 (268) 0 725.4 733 (39.1) 1.4 nm nm 21.2 21.2 nm 21.2 22.5 >100 >100 nm nm (27.9) (26.7) nm (28.4) >100 425 485 0 0 973 (267) 0 706 347 (97) (157) 0 0 1,813 (490) 0 1,324 1,332 >100 >100 nm nm 86.3 83.3 nm 87.4 >100 1HFY09 largely relates to one-off gain from lease transaction of Rp464bn.

* Adjusted for gain from lease transaction (FY09) and unrealised forex gains/losses. Source: Company, RHBRI

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Page 2 of 4

3 August 2010

Table 3: Valuation Value RMm Value/share RM Comments

Celcom Excelcomindo Dialog Robi SunShare (M1) Idea Others Firm value Add: Cash Less: Debt Equity Value Source: RHBRI

26,888.4 8,302.1 2,668.4 1,094.2 920.3 2,583.3 353.9 42,810.6 2,235.0 (5,000.0) 40,045.6

3.18 0.98 0.32 0.13 0.11 0.31 0.04 5.07 0.26 (0.59) 4.74

DCF based on WACC = 9.9% 68.5% stake @ EV/EBITDA of 6x 84.8% stake at market price 70% stake @ EV/EBITDA of 8x 29.7% stake at market price less net debt of SunShare 19% stake @ consensus median target price Relates to Samart Corp, Samart I-Mobile and TMIC Holding company level cash as at end-2009 plus RM1,865m proceeds from XL stake selldown Holding company level debt as at end-2009

Table 4 : Earnings Forecasts FYE Dec (RMm) FY09a Turnover Turnover growth (%) EBITDA EBITDA margin (%) Dep. & amort. EBIT EBIT margin (%) Net interest expense Jointly controlled entities Associates 13,105.1 15.5 5,624.3 42.9 (2,860.3) 2,764.0 21.1 (199.1) (59.5)

FY10F

FY11F

FY12F

Table 5 : Forecast Assumptions FYE Dec FY10F Celcom rev gwth (%) Celcom EBITDA margin (%) XL rev gwth (%) XL EBITDA margin (%) Dialog rev gwth (%) Dialog EBITDA margin (%) Capex (RMm) 11.5 44.3 20.2 50.0 9.4 37.8 3,633

FY11F 8.5 44.5 9.2 50.0 10.7 39.9 3,645

FY12F 5.9 44.9 10.8 50.0 8.5 39.8 3,561

14,698.1 16,094.4 17,208.8 12.2 9.5 6.9 6,641.2 45.2 7,312.9 45.4 7,902.8 45.9

(2,529.9) (2,753.8) (2,964.4) 4,111.3 28.0 (524.6) 91.6 4,559.1 28.3 (340.8) 114.7 4,938.4 28.7 (322.3) 171.0

160.8 108.1 112.9 119.6 0.0 0.0 0.0 0.0 Pretax Profit 2,666.2 3,786.4 4,446.0 4,906.7 Tax (910.3) (1,211.7) (1,422.7) (1,570.1) Minorities (103.2) (341.5) (426.6) (489.0) 2,233.2 2,596.7 2,847.6 Net Profit 1,652.7 2,233.2 2,596.7 2,847.6 Core Net Profit 1,413.7 Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank (previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

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Page 3 of 4

3 August 2010
RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. 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. RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

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