Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with a lower sum-of-parts-based fair value of RM5.32/share (from an earlier RM6.05/share), which translates to an unchanged FY19F EV/EBITDA of 6x, which is 1SD below its 3-year average of 7x. The lower SOP mainly stems from the decline in market valuations for the group’s stakes in XL Axiata, Dialog Axiata and Vodafone Idea.

• We have also slightly reduced Axiata’s FY18F-FY20F earnings by 1-2% from significant cuts in the group’s 66.5%-owned XL Axiata’s (XL) earnings as XL’s 9MFY18 normalised loss of IDR91bil was worse than expectations.

• We have reversed FY18F earnings to a loss of IDR112bil while reducing FY19F-20F earnings by 11%-16%. As a comparison, our earlier XL FY18F earnings of IDR72bil was already only 15% of street’s IDR468bil.

• Even though we had forewarned that XL’s bottom line is still at a volatile recovery phase back in May this year amid an ongoing prepaid SIM card registration campaign, XL’s 68% QoQ decline in 3QFY18 loss to IDR27bil is still disappointing.

• The loss stemmed largely from a 3QFY18 interest cost increase of 9% QoQ, RM61mil realised forex loss and 45% decline in expense write-backs.

• On a positive note, XL’s revenue trajectory regained its QoQ upward momentum with a growth of 5% driven by a service revenue increase of 6%, which delivered a 1.2ppt improvement in EBITDA margin to 37.2%

• The QoQ revenue growth stemmed from a 900K increase in prepaid subscribers to 52.9mil and 63K growth from the postpaid segment to 954K, supported by an IDR3K increase in monthly postpaid average revenue per user (ARPU) to IDR103Kss.

• This was expected following the normalisation of the group’s subscriber growth with the completion of the prepaid SIM registration exercise together with 3QFY18 sales and marketing costs falling to 8% of service revenue, down from 11% in 2QFY18.

• XL’s postpaid segment, which was spared this prepaid administrative hassle, grew at a faster pace by 51% YoY in 3QFY18. Data share of service revenue continues to rise to 80% from 77% in 1QFY18, up from 63% in 1QFY17.

• While XL's revenue growth continues to be underpinned by its dual-brand transformation programme under XL and Axis, its sustainability may be constrained by rising competitive pressures over the longer term, while faster growing ex-Java revenues deliver lower EBITDA margins.

• XL’s share price has declined since the past quarter, contributing to its proportion in Axiata’s SOP, decreasing further from 1% to 0.9%. Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, below its 3-year average of 7x.

Source: AmInvest Research - 1 Nov 2018