PP 7767/09/2010(025354)

22 April 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
22 April 2010
MARKET DATELINE

Axiata Share Price

Fair Value
:
:
RM3.73
RM4.05
Mixed Outlook For Regional Cellcos Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (AXIATA; Code: 6888) Bloomberg: AXIATA MK

Net Core EPS Net
FYE Turnover Profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)

2008 11,347.7 498.0 9.2 14.4 -49.8 25.8 7.1 1.13 7.5 0.0
2009 13,105.1 1,652.7 21.6 18.4 27.1 20.3 3.3 0.57 9.6 0.0
2010f 14,395.5 1,996.4 23.6 23.6 28.8 15.8 22.5 2.7 0.43 10.4 0.0
2011f 15,641.5 2,291.3 27.1 27.1 14.8 13.7 26.2 2.3 0.31 10.7 0.0
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Celcom. Having addressed congestion issues late-2009, management Issued Capital (m shares) 8,445.2
Market Cap(RMm) 31,500.2
remains positive on the growth potential in the mobile broadband segment.
Daily Trading Vol (m shs) 12.4
This is mainly due to: (1) Broadband penetration in Malaysia remains fairly 52wk Price Range (RM) 1.89 – 4.05
low, suggesting that there is still tremendous room for this segment to Major Shareholders: (%)
grow; (2) Different market segmentation (not all players are focusing on Khazanah Nasional 44.5
the mobile broadband segment); and (3) Marketing activities for Celcom EPF 16.5
has started to intensify following the recent network upgrade. ASB 6.6

♦ Indonesia. Management indicated that XL is unlikely to engage in M&A FYE Dec FY10 FY11 FY12
activities in Indonesia as management opines that the benefits from such an EPS chg (%) - - -
exercise does not appear to be compelling enough. Looking ahead, Var to C.EPS (%) 5.1 3.7 -
management believes the competitive landscape in Indonesia will remain
PE Band Chart
relatively stable, with the major mobile operators focused on maximising
revenue from their subscriber base.
PER = 20x
♦ India. The bids for 3G spectrum in India have increased by as much as
PER = 15
PER = 10x
63% since the auction began on 9 Apr 2010. While this may raise the risk of
Idea requiring a cash call, potential mitigating factors include: 1) Idea’s
spectrum bids are only for circles where it is strong in; 2) Idea has sufficient
capacity to raise debt further; and (3) Idea could raise another US$1bn via
the disposal of Indus Tower, if needed.
♦ Sri Lanka. Management indicated that the operating environment for
Relative Performance To FBM KLCI
telecommunication services in Sri Lanka remains challenging, and Dialog
will continue to focus on its mobile operations and at the same time,
address its uncompetitive cost structure with staff and network costs being Axiata
some of the key focus areas.
♦ To announce dividend policy in a few months’ time. Given the
improving performance from most of its subsidiaries and expected lower
capex going forward, management indicated that it may start paying FBM KLCI
dividends from FY11 (that is one year earlier than its initial plan).
♦ Earnings forecasts. Maintained.
♦ Risks. These include: (1) Weaker-than-expected performance by Celcom as Chye Wen Fei
well as from regional cellcos due to competition as well as macroeconomic (603) 92802172
factors (inflation, etc); and (2) Over-priced acquisitions. chye.wen.fei@rhb.com.my

♦ Investment case. We are keeping our SOP-derived fair value at RM4.05 David Chong, CFA
and Outperform recommendation on the stock. We continue to like Axiata (603) 9280 2186
given its exposure to the recovery in emerging markets where mobile david.chong@rhb.com.my
penetration rates remain low.

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Visit Note

♦ Celcom – so far so good. Having addressed congestion issues late-2009, management remains positive on the
growth potential in the mobile broadband segment. This is mainly due to: (1) Broadband penetration in Malaysia
remains fairly low (household penetration of 31.7% as at end-2009), suggesting that there is still tremendous
room for this segment to grow; (2) Different market segmentation (not all players are focusing on the mobile
broadband segment); and (3) Marketing activities for Celcom have started to intensify following the recent
network upgrade. On the whole, we gather that there has been a slight pickup in broadband net adds since Jan
10. As for Digi’s recent move to bring in the iPhone, Celcom is contemplating a similar move to complement its
range of smartphones, which is currently dominated by Blackberries. No firm decision has been made yet.

♦ Indonesia – M&A activities unlikely, organic growth from now onwards. Management indicated that XL is
unlikely to engage in M&A activities in Indonesia as management opines that the benefits from such an exercise
does not appear to be compelling enough (e.g. from the perspective of network coverage, XL has already
achieved a network coverage of 80-90% in Indonesia and hence, there is not much more to be gained from
acquiring). Looking ahead, management believes the competitive landscape in Indonesia will remain relatively
stable, with the major mobile operators focused on maximising revenue from their subscriber base.

♦ India – 3G spectrum bid started, and bids are on the rise. The bids for 3G spectrum in India have increased
by as much as 63% (in particular, the major metro circles such as Gujarat, Delhi, Mumbai, etc.) since the auction
began on 9 Apr 2010. While this may raise the risk of Idea requiring a cash call, potential mitigating factors
include: 1) Idea’s spectrum bids are only for circles where it is strong in; 2) Idea has sufficient capacity to raise
debt further; and (3) Idea could raise another US$1bn via the disposal of Indus Tower, if needed. Worst case,
Idea may require equity injection of around US$1-1.5bn by end-2010/early 2011, of which, Axiata's portion
would only be around US$200-300m.

♦ Sri Lanka – operating environment remains challenging. Management indicated that the operating
environment for telecommunication services in Sri Lanka remains challenging as consumer spending post
economic crisis has yet to pick up significantly. Dialog will continue to focus on its mobile operations and at the
same time, address its uncompetitive cost structure with staff and network costs being some of the key focus
areas.

♦ Axiata Bangladesh – EBITDA may remain volatile on sim tax. Management appears to be more upbeat on
AxB (especially relative to its operations in Sri Lanka) given the huge population and low penetration there,
which, in turn, suggests ample growth potential. While management was positive on the revenue growth potential
ahead, EBITDA could remain volatile in the near term due to structural issues such as the sim tax subsidy.

♦ To announce dividend policy in a few months’ time. Given the improving performance from most of its
subsidiaries and expected lower capex going forward, management indicated that it may start paying dividends
from FY11 (that is one year earlier than its initial plan). Management hinted that a formal dividend policy is likely
to be in place in a few months’ time and could be announced either in conjunction with its 2Q or 3Q results
announcement. Assuming: (1) a dividend payout ratio of 30%; and (2) dividends are declared starting from FY11
net profit; we estimate a full-year net DPS of 8.1 sen, which translates to a net yield of 2.2%.

Risks

♦ Risks to our view. The risks include: (1) Weaker-than-expected performance by Celcom as well as from regional
cellcos due to competition as well as macroeconomic factors (inflation, etc); and (2) Over-priced acquisitions.

Earnings Forecasts

♦ Earnings forecasts. Maintained.

Valuation and Recommendation

♦ SOP-based fair value raised. We are keeping our SOP-derived fair value at RM4.05 and Outperform
recommendation on the stock. We continue to like Axiata given its exposure to the recovery in emerging markets
where mobile penetration rates remain low.

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Table 2 : Valuation

Value /
Value share Comments
RMm RM

Celcom 26,815.9 3.18 DCF based on WACC = 9.9%

Excelcomindo 6,013.6 0.71 86.5% stake @ EV/EBITDA of 5x
Dialog 1,435.7 0.17 84.8% stake at market price
TMIB 686.7 0.08 70% stake @ EV/EBITDA of 6x
SunShare (M1) 914.3 0.11 29.7% stake at market price less net debt of SunShare
Idea 2,531.0 0.30 19% stake @ consensus median target price
Others 353.9 0.04 Relates to Samart Corp, Samart I-Mobile and TMIC
Firm value 38,751.0 4.59
Add: Cash 400.0 0.05 Holding company level cash as at end-2009
Less: Debt (5,000.0) (0.59) Holding company level debt as at end-2009
Equity Value 34,151.0 4.04

Source: RHBRI

Table 3 : Earnings Forecasts Table 4 : Forecast Assumptions

FYE Dec (RMm) FY08A FY09A FY10F FY11F FYE Dec FY10F FY11F

Turnover 11,347.7 14,395.5 15,641.5 15,040.2 Celcom rev gwth (%) 11.5 8.5
Turnover growth (%) 13.5 9.8 8.7 (3.8) Celcom EBITDA margin (%) 44.3 44.5
XL rev gwth (%) 12.1 6.7
EBITDA 4,318.8 6,143.3 6,723.7 6,706.1 XL EBITDA margin (%) 45.5 46.0
EBITDA margin (%) 38.1 42.7 43.0 44.6 Dialog rev gwth (%) 9.4 10.7
Dialog EBITDA margin (%) 28.2 29.1
Dep. & amort. (2,338.5) (2,860.3) (2,567.9) (2,792.6)
Capex (RMm) 4,150 3,665
EBIT 1,980.4 2,764.0 3,575.4 3,931.1
EBIT margin (%) 17.5 21.1 24.8 25.1
Net interest expense (1,015.1) (786.3) (635.3) (528.5)
Forex gains/(losses) (238.1) 587.2 - -
Jointly controlled
(142.4) (59.5) 91.6 114.7
entities
Associates 83.0 160.8 105.7 108.9

Pretax Profit 905.8 2,666.2 3,137.4 3,626.2

Tax (434.7) (910.3) (1,004.0) (1,160.4)
Minorities 26.9 (103.2) (137.0) (174.5)
Net Profit 498.0 1,652.7 1,996.4 2,291.3
Core Net Profit 783.0 1,406.7 1,996.4 2,291.3
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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