Axiata Group Berhad TP: RM5.40 (+9.5%) XL Looking Better, but Celcom Still Needs Time

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: R E S U L T S U P D A T E Tuesday, September 05, 2017 FBMKLCI: 1, Sector: Telco Axiata Group Berhad TP: RM5.40 (+9.5%) XL Looking Better, but Celcom Still Needs Time THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Last Traded: RM4.93 Paul Yap, CFA Tel: paulyap@ta.com.my HOLD Review Axiata announced a 1HFY17 core net profit of RM644mn (+21.7% QoQ, -22.9% YoY). Results were within ours and consensus estimates at 49.3% and 46.4%. A first interim dividend of 5.0sen/share was declared, unchanged from last year. After a disappointing first quarter, the group delivered a better performance, as the majority of its opcos (except Smart) reported improved sequential results. Helped by price discipline in the industry, XL s transformation programme is bearing fruit as service revenue growth widened to 9.3% QoQ. Celcom and Dialog benefitted from cost saving initiatives, which have yielded opex and capex savings of RM241mn and RM338mn in the 1HFY17. Celcom continues to stabilise, but subscriber traction remains an issue. Ncell rebounded from a weak first quarter as subscriber net adds and stabilising ARPU helped induce growth. Celcom. Celcom continues to struggle to drive subscriber growth, with net churns (-317k) now lasting for seven quarters. Mimicking the industry, the weakness was distinct in the prepaid segment, with a QoQ decline of 287k subscribers. However, service revenue rebounded 1.4% QoQ, helped by higher ARPUs. Festive promotions aided acquisitions of higher ARPU subs as postpaid and prepaid ARPU increased to RM82 and RM31. Cost savings helped with a 2.4pp improvement in EBITDA margins. YTD cost savings and avoidance amounted to RM366mn. Not a finished article, there is still work to be done in terms of network, sales & distribution and digitisation efforts. XL. Recoveries persisted, with service revenue (+9.3% QoQ) recording its highest growth since embarking on its transformation programme. Data monetisation activities are yielding results, as data now accounts for 67% of service revenues. EBITDA increased 12.2% QoQ, as margins expanded 1.5pp. A total of 2.5mn subscriber QoQ net adds were recorded. We expect the growth momentum to sustain on better price discipline in the industry. Also, issues relating to its dual brand strategy and distribution channels appear to be under control and should fare better ahead. Dialog. Despite the impact of consumption taxes, revenue, EBITDA and PAT rebounded 3.8% QoQ, 12.6% QoQ and 51.8% QoQ. Led by aggressive subscriber acquisitions, its subscriber base grew 1.3% QoQ and 13.4% YoY to 12.4mn. A 12% QoQ growth in data helped reversed a declining trend in blended ARPU to LKR383 (+2.1% QoQ). Margins improved QoQ due to cost initiatives, led by a fall in staff cost (-9% QoQ) and sales & marketing expenses (-3% QoQ). Realised cost savings for the 1HFY17 was at LKR1.3bn. Robi. The integration with Airtel is progressing well, delivering on synergies. Proforma revenue and EBITDA improved 9.3% QoQ and 13.0% QoQ. Service revenue outperformed the industry, rising 7.8% QoQ. Its subscriber and revenue market share increased 1.4pp and 0.8pp to 30.0% and 27.5%. Although profits were registered during the quarter, this was due to the recognition of a total tax credit related to a subsidiary acquired Share Information Bloomberg Code AXIATA MK Stock Code 6888 Listing Main Market Share Cap (mn) 8,998.1 Market Cap (RMmn) 44, wk Hi/Lo (RM) 5.77/ mth Avg Daily Vol ('000 shrs) 5,719.3 Estimated Free Float (%) 23.4 Beta 1.38 Major Shareholders (%) Khazanah Nasional EPF Skim Amanah Saham Forecast Revision (%) FY17 FY18 Forecast Revision (%) Net Profit (RMm) 1,409 1,522 Consensus 1,338 1,555 TA/Consensus Previous Rating Hold (Maintained) Scorecard % of FY vs TA 49.3 Within vs Consensus 46.4 Within Financial Indicators FY17 FY18 Net debt/ebitda (x) CFPS (sen) P/CFPS (x) ROE (%) ROA (%) NTA/Share (RM) P/NTA (x) Share Performance Price Change (%) Axiata FBMKLCI 1 mth 2.9 (0.1) 3 mth (1.2) (0.8) 6 mth mth (11.6) 5.7 (12-Mth) Share Price relative to the FBM KLCI Source: Bloomberg Page 1 of 7

2 in 2016 totalling BDT1.9bn. Smart. Uncharacteristically, Smart recorded a 6.3% QoQ decrease in revenue due to intense price competition in the market. EBITDA and PAT fell by 7.6% QoQ and 12.8% QoQ. However, on a YoY basis, Smart remains ahead with a revenue, EBITDA and PAT growth of 12.1% YoY, 12.2% YoY and 11.4% YoY. Data now make up half of its revenues, with data subscribers increasing 10.4% YoY to 3.6mn. Ncell. After a challenging first quarter, revenue, EBITDA and PAT recovered 5.8% QoQ, 13.2% QoQ and 7.2% QoQ. This was driven by net adds of 413k subscribers during the quarter. Its 4G services were launched on 1 June 2017, with data revenues increasing 10.0% QoQ. However, ILD revenues (-22.0% YoY) remain under pressure from aggressive ILD pricing. Voice revenues were muted by a reduction in pulse rate (minimum duration for which a call will be charged) to a 10sec charging block from 20sec before. edotco. Its tower business proforma revenue improved 8.7% YoY. Towers owned and managed sites increased 5.9% YoY and 22.2% YoY to 17.7k towers and 8.6k sites. A higher tenancy ratio of 1.58x was achievd vs. 1.54x a year ago. Associates. Lower contributions were recognised from its associate stakes in Idea and M1. Feeling the impact of disruptive tariffs by Reliance Jio, Idea contributed a loss of RM134.6mn in the 1HFY17 (1HFY16: +RM79.9mn). Profit contributions from M1 also declined 15.1% YoY to RM60.3mn. Given its ailing performance, we do not discount the potential disposal of its stakes in Idea and M1 to strengthen its balance sheet. Postmerger of Idea and Vodafone, a review is likely as its diluted stake will no longer be strategic. Meanwhile, although the strategy review of its stake in M1 has been called off, management remains open on disposing the asset if the price is right. Post the private placement exercise at edotco and partial sale of its stake in Smart, gross debt/ebitda and net debt/ebitda was lowered to 2.3x and 1.4x. Acquisition of Deodar Confirming media speculations, the group announced the proposed acquisition of Deodar Private Limited and its portfolio of ~13k towers for US$940mn. This is on the back of its recent acquisition of Tanzanite Tower Private Limited, which has 700 towers, also in Pakistan. A partnership will be formed with Dawood Hercules Corporation (DH Corp), one of the country s largest conglomerate with a market cap of US$600mn, who will eventually hold a 45% stake in edotco Pakistan Private Limited. edotco will hold the remaining 55%. This will involve an additional subscription of 955.3mn shares by edotco for US$154.8mn and 1,743mn shares by DH Corp for US$166.0mn. The acquisition will be financed through a combination of external debt (US$600mn) and equity (US$340mn). Post-acquisition, the group s gross debt/ebitda will increase from 2.3x to 2.4x. We believe the acquisition price is fair, translating into an EV/tower of 72.3k/tower. This is lower than the implied EV/tower of 128.6k/tower for its acquisition of Tanzanite. However, Tanzanite has a higher tenancy ratio of 1.6x vs. Deodar s 1.3x. 73% of Tanzanite s towers are located in urban areas, compared to 51% for Deodar. Jazz (merger of Mobilink and Warid) serves as the anchor tenant for Deodar. Wi-tribe is the major tenant for Tanzanite. Combined, both acquisitions translate into an implied EV/EBITDA of 8.1x below the Asian trading comparable of 10.0x. Page 2 of 7

3 The entity will extend edotco s position as the leading towerco in the country with a portfolio of 13.7k towers (overlap towers) and a tenancy ratio of 1.4x translating into a 34% tower market share. The average rental rate in Pakistan is PKR90-120k/month/tower. In the larger scheme of things, edotco will leapfrog from 12 th place to become the 8 th largest global towerco with a portfolio of 31.5k towers. Pakistan is deemed as an attractive market, due to its sizeable population (over 190mn people) and low penetration rates. With the potential for growth, mobile, data and smartphone penetration rates are low at 73%, 24% and 20%. Due to previous efforts by mobile operators to preserve competitive advantages, towers are largely unshared, with opportunities to grow tower tenants. The acquisition is expected to be accretive off the bat. Based on audited FY16 numbers, revenue, EBITDA and PATAMI is expected to increase by 6.2%, 6.9% and 3.2%. ROIC is expected to improve to 4.7% from 4.5%. The acquisition is expected to be completed in the 4Q2017. Addressing listing plans, an IPO is not part of immediate targets. Instead, focus (next 12 to 18 months) will be on integrating towers. Impact We make the following changes to our model: 1. Imputing cost savings, we raise our FY17-19 earnings for Celcom by 10-11%. 2. We raise our capex estimates by 9-13% for FY17-19, to be in line with guidance. We increase our FY17/FY18/FY19 earnings by 7.6%/6.1%/5.3% to RM1,409mn/RM1,522mn/RM1,836mn. Outlook The group is on track to meet KPIs. This include a revenue and EBITDA growth of 9-11% and 7-9%, ROIC and ROCE are targeted at %. Capex guidance, however, will be raised to RM7.1bn (from RM6.6bn). Additional capex will be utilised to pursue data opportunities at Robi and to expand XL s ex-java network. Representing the majority of revenues, successful recoveries at Celcom and XL are key opportunities. Although XL is responding well to its transformation programme, there is still plenty of work to be done at Celcom. While Celcom s product offerings are on par with the market, improvements are needed in terms of network quality and sales & distribution. On the cost side, benefits of its cost optimisation efforts are beginning to filter through. Recall, the group is expecting to save a total of RM2.3bn for FY RM800mn will be realised in FY17, with the remainder RM1.5bn between FY18 and FY19. Key risks in our view are competitive pressures at Malaysia, Cambodia, Singapore and India. There are also regulatory uncertainties with regards to spectrum reviews in Malaysia and Bangladesh. Valuation We raise our TP for Axiata to RM5.40/share based on a SOP valuation. While XL is performing well, we believe more time is required at Celcom to achieve recoveries. Although most of its opcos showed broad based recovery from a weak first quarter, we prefer to stay on the side lines to see if trends persists before turning positive. Additionally, dividend yields are expected to remain uninspiring over the next two years at %. HOLD. Page 3 of 7

4 Figure 1: Earnings Summary (RMmn) FYE Dec FY15 FY16 FY17F FY18F FY19F Revenue 19,883 21,565 23,072 23,884 24,535 EBITDA 7,284 8,013 8,798 9,362 9,886 EBITDA margin (%) Depreciation and amortisation (4,170) (5,595) (5,685) (5,817) (5,836) EBIT 3,114 2,418 3,113 3,545 4,051 Net finance costs (658) (1,018) (1,092) (1,075) (1,074) JV/Associates (75) (40) EI 441 (290) Profit before tax 3,331 1,140 2,070 2,394 2,937 Taxation (695) (482) (525) (642) (774) MI (82) (153) (136) (230) (327) Profit after tax 2, ,409 1,522 1,836 Core profit 2,071 1,418 1,409 1,522 1,836 EPS (sen) EPS growth (%) (8.2) (31.5) (0.7) PER (x) EV/EBITDA (x) DPS (sen) Dividend yield (%) Figure 2: Sum of Parts Valuation Equity Value Effective Equity Value /Share Stake (RM mn) Value (RM mn) (RM) % of SOP Valuation Method Celcom (Malaysia) 25, % 25, % DCF: WACC 7.0%, TG: 1.0% XL Axiata (Indonesia) 16, % 11, % DCF: WACC 9.0%, TG: 3.0% Idea Cellular (India) 22, % 4, % Consensus TP Dialog Axiata (Sri Lanka) 2, % 2, % Consensus TP Robi (Bangladesh) 3, % 2, % DCF: WACC 13.8%, TG: 3.0% M1 (Singapore) 5, % 1, % Consensus TP Smart (Cambodia) 2, % 1, % 10x CY18 EPS Ncell (Nepal) 9, % 7, % 10x CY18 EPS Holding Co Net Cash -7, % Total 48, Figure 3 : Forward PE Figure 4 : Forward EV/EBITDA x x sd: 33.7x sd: 9.5x Mean: 28.7x -1sd: 23.8x Mean: 8.5x -1sd: 7.5x 15.0 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Source: Bloomberg, TA Securities Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Source: Bloomberg, TA Securities Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Page 4 of 7

5 Figure 5: 1HFY17 Results Analysis (RMmn) FYE Dec 2QFY16 1QFY17 2QFY17 QoQ (%) YoY (%) 1HFY16 1HFY17 YoY (%) Revenue 5,310 5,881 6, ,319 11, Celcom 1,678 1,606 1, (3.5) 3,341 3,226 (3.4) XL 1,580 1,754 1, ,321 3, Dialog ,191 1, Robi ,268 1, Smart (6.6) Ncell , Others EBITDA 2,066 2,154 2, ,941 4, Depreciation and amortisation (1,368) (1,509) (1,457) (3.5) 6.5 (2,532) (2,967) 17.1 EBIT ,409 1, Finance income Finance cost (295) (319) (338) (550) (657) 19.3 JV/Associates 19 (31) (105) (651.7) 87 (136) (257.0) Others (26) (664.6) (48) 200 (517.6) PBT Tax (177) (130) (92) (29.2) (48.0) (328) (222) (32.2) MI (43) (23) (72) (76) (95) 24.4 PAT Core net profit (4.5) (22.9) Celcom (16.3) (25.3) XL (27) (21) (6) (71.4) (77.8) (70) (27) (61.4) Dialog (14.0) Robi (1) (59) 30 (150.8) (3,100.0) 19 (29) (252.6) Smart (20.5) Ncell Others (108) (93) (197) (45) (290) Capex 1,236 1,074 1, ,289 2, EPS (sen) DPS (sen) n/a Profitability ratios pp pp pp EBITDA margin (%) (1.4) (1.1) EBIT margin (%) (1.4) PBT margin (%) (1.2) Net profit margin (%) (1.1) (2.7) Tax rate (%) (17.1) (27.2) (11.0) *adjusted for forex gains/losses, Xl gain on disposal of towers, XL accelerated depreciation, others Page 5 of 7

6 FYE Dec 2QFY16 1QFY17 2QFY17 QoQ (%) YoY (%) 1HFY16 1HFY17 YoY (%) Celcom (RMmn) Revenue 1,682 1,609 1, (3.6) 3,347 3,230 (3.5) EBITDA (2.7) 1,221 1,118 (8.4) Normalised EBITDA (1.9) 1,320 1,217 (7.8) EBITDA margin (%) (1.8) PATAMI (17.2) (25.7) Normalised PATAMI (10.6) PATAMI margin (%) (1.5) Postpaid 2,897 2,946 2,916 (30) 19 Prepaid 8,338 7,300 7,013 (287) (1,325) ARPU (RM) Postpaid Prepaid XL (Rpbn) Revenue 5,251 5,275 5, ,887 10, EBITDA 2,065 1,848 2, ,256 3,921 (7.9) EBITDA margin (%) (2.8) (3.3) PAT (35.7) Normalised PAT (9) (1,144.4) (168) 114 (167.9) PATAMI margin (%) (0.2) (1.5) Postpaid Prepaid 43,482 47,437 49,895 2,458 6,413 ARPU (IDR'000) Postpaid (12.9) (4.4) Prepaid (2.9) Dialog (SLRmn) Revenue 21,065 22,165 23, ,222 45, EBITDA 7,057 7,221 8, ,076 15, EBITDA margin (%) PAT 2,287 1,546 2, ,957 3,892 (21.5) PAT margin (%) (0.7) (3.1) Postpaid 1,187 1,260 1, Prepaid 9,770 11,008 11, ,388 ARPU (SLR) Postpaid 1,180 1,088 1, (3.6) Prepaid Robi (BDTmn) Revenue 12,435 15,469 16, ,270 32, EBITDA 4,005 2,722 2,670 (1.9) (33.3) 7,986 5,392 (32.5) EBITDA margin (%) (1.7) (16.3) (16.2) PAT (34) (1,711) 685 (140.0) (2,114.7) 363 (1,026) (382.6) PAT margin (%) (0.3) (11.1) (3.2) (4.7) Postpaid Prepaid 27,255 35,857 39,214 3,357 11,959 ARPU (BDT) Postpaid (3.1) (11.5) Prepaid (0.8) (2.3) Page 6 of 7

7 FYE Dec Ncell (NPRmn) Revenue 15,392 13,679 14, (6.0) 29,446 28,150 (4.4) EBITDA 9,962 8,686 9, (1.3) 19,192 18,517 (3.5) EBITDA margin (%) PAT 5,944 4,766 5, (14.0) 10,796 9,877 (8.5) PAT margin (%) (3.3) (1.6) Postpaid (15) (11) Prepaid 13,535 14,740 15, ,633 ARPU (BDT) Postpaid (20.2) Prepaid (18.4) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 7 of 7