Axiata Group Bhd  (Feb 2, RM4.86)
Maintain buy at RM4.80 with target price RM6.25: XL Axiata’s full-year FY10 core net profits of 3.04 trillion rupiah (RM1.02 billion) came in 7.3% higher than consensus estimates, driven by a strong revenue growth of 27% (three times higher than expected industry average of 8%) and earnings before interest, tax, depreciation and amortisation (Ebitda) margins of 52.7% (which expanded by 800 basis points year-on-year).

Voice revenue was flat quarter-on-quarter (q-o-q) as XL stimulated voice usage successfully (during off-peak hours) by bringing down voice tariffs in response to its competitors lowering down their prices. Data and value-added service revenue fell q-o-q after the peak Lebaran season in 3QFY10. SMS revenue however, continued to grow strongly by 17.1% q-o-q. Going forward, XL expects its FY11 revenue growth to be in line or faster than the industry average. XL however, cautioned that they should not grow too much faster than the market as they see this as a risk that could potentially backfire on themselves (by triggering competitive response by its rivals, that is lowering of tariffs, etc.).

Ebitda margins continued to expand by 60 basis points q-o-q, driven by a 27.3% q-o-q decline in infrastructure expense owing to a new calculation method for 2G frequency fee implemented since December 2010. This was however, offset by a 24.3% q-o-q increase in marketing cost as it intensified its promotional campaigns in 4QFY10. Going into FY11, management guided Ebitda margins to be more 50%, although worse-than expected competition could pose some downside risks to margins.

XL introduced a new dividend policy of a minimum 30% payout ratio of the preceding year’s normalised net income. XL has the intention to progressively increase the payout ratio in the future, as its free cash flow improves further. With a 66.7% stake in XL, we estimate that Axiata would stand to pocket about RM205 million in dividends from XL this year.

We reiterate “buy” on Axiata with a sum-of-parts derived target price of RM6.25. Valuations are not demanding, given that earnings are expected to grow strongly. The maiden dividends to be paid this year will act as a share price catalyst, going forward. Risks include potential loss of valuable 900Mhz spectrum for Celcom in the upcoming spectrum refarming exercise and worse-than-expected competition in Indonesia. - ECM Libra Investment Research