Investment Highlights

• We maintain our HOLD call on Axiata Group (Axiata) with an unchanged fair value of RM3.86/share, which is at a 25% holding company discount to our unchanged sum-of-parts-based fair value of RM5.14/share. This implies an FY19F EV/EBITDA of 5x, which is 2 SDs below its 2-year average of 7x.

• We have fine-tuned Axiata’s FY18F-FY20F earnings even though its 66.5%-owned XL Axiata’s (XL) FY18 loss of IDR3.3tril was worse than expected. This stemmed largely from the IDR4.2tril accelerated depreciation for 2G assets being replaced for 4G connectivity, and is unlikely to recur in FY19F. XL currently accounts for 9% of Axiata’s SOP.

• Excluding these lumpy accelerated depreciation, IDR1tril tax impact and IDR100bil forex loss, XL’s FY18 normalised loss of IDR9bil was in fact better than our and consensus expectations. We also note that XL’s FY18 revenue and EBITDA were in line with our and street’s expectations.

• XL’s 4QFY18 revenue trajectory continued to grow for the third consecutive quarter, rising 3.4% QoQ, underpinned by service revenue growth of 3.8% QoQ while EBITDA margin improved 1.6ppts to 38.9%.

• The QoQ revenue growth stemmed from a 1mil increase in prepaid subscribers to 53.9mil and a 70K growth from the postpaid segment to 1mil, supported by an IDR1K increase in blended average revenue per user (ARPU) to IDR33K. Data share of 4QFY18 service revenue continues to expand to 82% from 77% in 1QFY18, up from 63% in 1QFY17.

• XL’s FY18 operational costs were lower 1% YoY as the 26% increase in sales and marketing was more than offset by lower salaries (-24%), infrastructure (-1%), overheads (-14%) and interconnection charges (-2%).

• While XL’s FY19F guidance for EBITDA margin remains in the high 30s, it has slightly moderated its revenue growth projection to “in line or better than market” from “above market” in FY18. FY19F capex remains on the growth trajectory, rising 10% to IDR7.5tril from IDR6.8tril capitalised in FY18. More than half will be spent ex-Java as the group intends to leverage its existing network.

• 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.

• Even though Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs. Maxis’ 11x, the group’s likely weak 4QFY18 results announcement on 22 February from further year-end asset impairments amid deteriorating overseas risk profile from Nepal’s capital gains tax charge on NCELL and intense mobile completion both locally and regionally could limit any mediumterm share price upside. Additionally, the government’s intention to reduce Khazanah Nasional’s holdings in GLC-linked companies currently casts shadows of a share overhang.

Source: AmInvest Research - 18 Feb 2019