Based on OpenSignal
KUALA LUMPUR: CIMB Equities Research is keeping its Add call on Axiata with a sum-of-parts based target price of RM4.40 as it sees its core company, Celcom's earnings rising.
It said on Friday Axiata aspires to improve Celcom’s earnings before interest, tax, depreciation and amortisation (Ebitda) by 25% over FY18-21.
“Axiata aims for RM900mil cumulative cost savings from network, sales/marketing and enhanced organisational productivity,” it said.
CIMB Research said Celcom is the largest core net profit contributor (70% in FY18F) and its performance is key to Axiata’s earnings outlook.
While its 9M18 service revenue (+2.1% yoy) fared well, Celcom’s Ebitda/core net profit (-5.6%/-8.3% on-year) was weak on higher operating costs..
For FY19F-21F, Axiata is shifting its focus towards cost efficiency at Celcom, aiming for cumulative cost savings of RM900mil and to improve Ebitda by 25% (margin: +5% pts).
“Based on OpenSignal’s latest report (June-August 2018), Celcom has overtaken Maxis and has the best 4G availability among the Big Four mobile operators (Feb 2016: third best).
“Its 4G speeds are also decent and second to just Maxis. However, its relentless pursuit has led to high network cost. Celcom now targets to cut network cost to c.15% of sales by FY21F (9M18: 20.0%), via structural initiatives (e.g. removing unnecessary sites),” it pointed out.
CIMB Research said Celcom’s A&P cost has eased gradually since 2011, via smarter spending (e.g. shifting to online media).
Over FY18-21, Celcom targets to cut this cost by a further 1% pt of sales, via digitalisation (e.g. sales app, digital reloads, self-serve) and rationalisation of distribution channels.
Meanwhile, through digitalisation and process simplification, Celcom was also able to undertake several initiatives in 2018 to enhance organisational productivity.
“We estimate these initiatives may yield significant cost savings of RM50mil-RM100mil per annum, or c.1% of sales, from FY19F onwards.
“After high capex spending in FY16-18F (average: RM1.3bn p.a.), we see Celcom’s capex easing to RM1.1bn/1.0bn in FY19/20F given already high 4G/4G+ coverage of 90%/78%.
“Hence, we forecast its free cash flow (FCF) to rise from RM525m in FY18F to RM816m/949m in FY19/20F.
“This will help to support Axiata’s cash dividend payments of RM848m/1.27bn in FY19/20F, besides dividends from Ncell and proceeds from the potential sale of M1 (c.RM1.64bn).
“We see Celcom’s Ebitda/core net profit rising 11.8%/16.8% in FY18-21F, which is more conservative than management’s aspirations,” it said.
The research house said coupled with i) XL's earnings recovery after a 1H18 price war, ii) Robi's narrower losses, and iii) cessation of equity accounting for Idea, we expect Axiata's FY19/20F core EPS (FY18F: -17.2%) to grow 50.2%/14.5% on-year, a key rerating catalyst. Axiata's FY19F enterprise value/operating free cashflow of 14.1 times is in line with the Asean telco average.
The downside risks: keener competition and adverse regulations.
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