CIMB still neutral on Axiata, cites lack of catalyst

CIMB Research yesterday retained a neutral stance on regional telecommunications player Axiata Group Bhd after the latter’s Indian associate earnings came in flat quarter-on-quarter (q-o-q).

“We make no adjustments to our earnings forecasts or sum-of-parts based target price of RM3.47 for Axiata pending the release of its 3Q results. Although its recent de-rating has taken valuations to more attractive levels, we continue to rate it a neutral as it lacks catalysts,” the research house said in a note yesterday.

CIMB recommended that clients switch to its top picks in the region namely, Thailand’s AIS (outperform, 130 baht target price), Thailand’s DTAC (outperform, 48 baht target price) and Telkom Indonesia (outperform, 9,600 rupiah target price).

Axiata is scheduled to release its 3Q09 results by end-November.

The research house noted that Axiata’s 14.99%-owned Indian investment, Idea Cellular Ltd, saw 2Q09 revenue fall 0.1% q-o-q despite being up 29.1% year-on-year. It also pointed out that Idea’s top line in its more established service areas has declined 2.5% q-o-q, although the declines were offset by revenue gains in new service areas as well as contributions from Spice Communications Ltd’s circles (operating areas).

“Average revenue per minute (ARPM) continued to exhibit downward momentum, falling 3.4% on a q-o-q basis to 0.56 rupees. We attribute this to the effects of stiff competition and unbelievably low pricing,” CIMB said.

Ebitda (earnings before interest, tax, depreciation and amortisation) also took a beating, falling 1.7 percentage points to 27.2% due to higher personnel cost, network operating expenditure, subscriber acquisition as well as advertising and promotion costs.

CIMB added that segmental breakdown showed margins were weak across the board in Idea’s more established 11 circles, the newer circles and the Spice circles. The Indus circle was the only one that bucked the trend.

“We are concerned about competition in India which has developed into a full-blown price war. Unlike its more established incumbents, Idea will be under greater pressure as it does not have the economies of scale that its larger rivals possess,” CIMB said.

Axiata added three sen to close at RM2.95 yesterday with 15.18 million shares done.