Monday, March 26, 2012

Axiata Berhad: Much Anticipated Disengagement

26 March 2012
Price Target: RM5.02
Share Price: RM5.12


News
# Local daily reported that U Mobile has submitted a request to terminate its domestic roaming (DR) agreement with Celcom Axiata last week.

# U Mobile is currently serving its notice of termination for 6 months, thus effective data of termination will be in mid-September but may also be earlier upon both parties’
agreements.

# The article also expects that U Mobile to ink a new DR agreement with another operator over the next 6 months.

Financial impact
Celcom’s earnings to be eroded by RM150-200m annually with the following breakdown:
1. Leasing of connection (E1) – RM8.5-9m per month; and
2. Usage based (mins/MB) – RM4-7.5m per month.

Comments
# This news did not surprise us at all as we have flagged this concern in our report titled “Celcom Breaking Up with U Mobile” dated on 24th Oct 2011.

# This event is very much anticipated as it is technically more feasible (less network signaling load and unnecessary handover) and operationally more economical (lower fixed monthly connection rental) to engage with one DR partner rather than two who have overlapped coverage.

# Hence, it is unlikely that U Mobile to ink a separate 2G DR agreement with another telco since the existing 3G DR agreement with Maxis has already provided 81% coverage
of Malaysia and service fallback to 2G should be inclusive.

# U Mobile’s 10-year partnership with Maxis which also include future LTE rollout has created conflict of interest in its current relationship with Celcom who has teamed up with DiGi.

# We do not expect Celcom to terminate this agreement earlier as payment from U Mobile contributes directly to its bottom line with negligible OPEX.

Catalysts
- Higher smartphone penetration boosting data ARPU.
- Strong growth in low penetration developing markets.
- More cost savings from collaboration with DiGi.

Risks
Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts
Unchanged as we have already factored this into our model.

Rating: HOLD, Target Price: RM5.02
Positives
Despite the challenging 4Q11, Axiata’s main businesses (Celcom, XL, Dialog) continue to execute well.

Negatives
Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation
We reiterate our HOLD call with unchanged target price of RM5.02. We opine that the robust growth story may have come to an end especially for Celcom and XL who are the
main contributors as market matures and competition intensifies.



Source: HLIB Research

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