Axiata Group Bhd
(April 1, RM7.06)
Maintain sell with a target price (TP) of RM7.08: We emerged from a meeting with mixed views on XL and Celcom’s prospects in financial year 2015 (FY15). On the one hand, we are positive on XL’s aspirations to climb up the value chain by targeting higher income subscribers. This is while concurrently maintaining its core base of budget conscious customers via the Axis brand.
Key discussion topics centred around XL’s change in business strategy, XL-Axis’ dual-brand approach, Celcom’s aggressive marketing drive to reverse last year’s lacklustre subscriber traction, and extent of damage caused by the East Coast floods on Celcom’s distribution channels and network infrastructure.
On the flipside, we believe XL’s hardened stance to stop responding to competitive pressure may be challenging to execute. This is on the back of a highly competitive market at the early stages of data adoption. In addition, XL’s existing lower-income subscriber base has proven to be highly price-sensitive in the past.
For Celcom, we are concerned that damage caused by 2014’s East Coast floods may be worse than initial expectations. We are cautious that usage and subscriber traction will take significant time to recover. We understand from management that Celcom is progressively repairing approximately 400 damaged network sites in the East Coast. Meanwhile, Celcom is also providing assistance to dealers by setting up temporary sales kiosks for damaged sales premises.
XL will now change its strategy to focus on profitability instead of gross subscriber adds. In the past, XL had aggressively pursued subscribers by lowering prices. This proved unsustainable due to erosion of profitability on the back of high acquisition costs and reduced revenue (from lowered pricing). In addition, these legacy customers also had low usage and high churn rates. Therefore, moving forward, XL will instead target high income generating customers (mid-high value) of better quality.
To achieve its strategy, XL will now shift its priority to earnings before interest, taxes, depreciation and amortisation (Ebitda) expansion (instead of top line), and revamp products, pricing, sales channels and management. Therefore, XL expects top line weakness in the first half of 2015 (1H15) with an eventual recovery in 2H15. As a result, management hinted that XL may be unable to achieve its initial revenue growth guidance of 6% to 6.5% (inline or better with market). Nevertheless, Ebitda margin guidance remains the same (mid-to-high 30s).
XL will now have two brands, comprising XL, a primary brand targeted at the “emerging middle class” (EMC) segment, and Axis, a tactical brand aimed at cost-conscious subscribers. Management is confident that XL’s decent network quality is able to attract the EMC segment given its low network utilisation (about 50% currently), comprehensive coverage in non-remote areas matches that of larger competitors, and reduced network congestion following weed-out of low-value subscribers that abuse data quotas.
The dual-brand strategy enables XL to move up the value chain in the high growth EMC segment by targeting businesses, families, and young professionals centred on the digital lifestyle. Management reiterated that XL will not compete head-on with Telkomsel in the high-income market. In addition, the group is also intent to preserve its lower income subscribers via Axis.
Celcom’s marketing team is aggressively focusing on execution to drive sales weakened by the lack of new product launches. Measures implemented so far include ensuring dealers receive early payouts to ease working capital, increasing number of dealers and frequency of dealer visits, increasing sales touchpoints at petrol station kiosks and convenience stores, having new product launches or relaunch of popular products.
Competitive and capital expenditure intensity at Malaysia and Indonesia, coupled with hiccups from Celcom’s IT system upgrade and aftermath of the East Coast floods render FY15 a challenging year. Furthermore, slow rate of data monetisation amid spiralling cannibilisation of voice/SMS by data will dampen earnings upside in the near- to medium-term. On the back of this muted outlook, we retain our “sell” recommendation on Axiata with a target price based on sum-of-parts. — TA Research, April 1
This article first appeared in The Edge Financial Daily, on April 2, 2015.