Axiata Group Bhd
(April 2, RM7.06)
Maintain buy: We maintain our “buy” call on Axiata at an unchanged fair value of RM7.90 per share after attending a meeting with Axiata, Celcom and Indonesia-based PT Axiata XL’s key management earlier this week. With a new management team in place and having completed the integration with Axis Telekom Indonesia, XL is now shifting its focus to profitability (against volume and subscriber growth previously). The three-phase strategy from financial year 2015 (FY15) to FY17 (and beyond) involves product revamps and repricing, 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 the first half (1H) of FY15 before recovering in 2H. Previous revenue guidance could be revised lower but this is a one-off impact for a structurally improved business model focusing on higher average revenue per user, subscribers and lower subscriber acquisition cost in the mid to long term.

The industry environment is conducive to accommodate this change — key incumbents have been successful in driving up rates in the past year, while industry consolidation driven by XL could have played a part in the more favourable pricing environment. More importantly, XL is not in isolation in driving this shift in focus from volume to value.

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 repositioning of the XL brand to manage changes in the industry’s competitive climate in the past was costly and took considerable time to take effect.

In Malaysia, Celcom should soon be ready to launch tactical offerings after having been absent for over a year. Focus now is on ground execution: (i) ensuring the Celcom brand is regaining visibility in the trade after a long absence; and (ii) exploring new distribution channels such as online platforms, convenience stores and petrol stations.

Despite the brief restructuring impact at XL, Axiata is broadly on the verge of earnings recovery. The share price has underperformed in the past 12 months; its valuations are most compelling among cellular companies and is best positioned for a dividend surprise. — AmResearch, April 2

This article first appeared in The Edge Financial Daily, on April 3, 2015.