Investment Highlights

• We maintain our HOLD call on Axiata Group (Axiata) with a higher fair value of RM4.05/share (from an earlier RM4.00/share), which is at a 25% holding company discount to our unchanged sum-of-parts-based fair value of RM5.40/share. This implies an FY19F EV/EBITDA of 5x, which is 2SDs below its 2-year average of 7x.

• We have raised Axiata’s FY18F–FY20F earnings by 1% as our operating cost assumptions have been reduced by 2% for the group’s 66.5%-owned XL Axiata’s (XL).

• This stems from XL’s 1QFY19 results coming in above our expectations with normalised earnings of IDR69bil, accounting for 33% of our earlier FY19F net profit, but only 12% of consensus estimates.

• XL’s 1QFY19 revenue dipped by 1% QoQ after 3 consecutive quarterly expansions due to lower interconnect fees but the uptrend trajectory remains intact as service revenue still registered an impressive 12% YoY growth and 2% QoQ to IDR5.8tril.

• EBITDA margin slid slightly by 0.7ppt QoQ to 38% due to the revenue dip, but operating expenses were flat QoQ at IDR3.7tril as lower interconnection charges (-29%) were offset by higher infrastructure costs (+6%), salaries (+9%) and overheads (+15%).

• The YoY revenue growth stemmed from a 300K increase in prepaid subscribers to 54mil and 244K growth in the postpaid segment to 1mil driven by the group’s ex-Java focus.

• This is supported by an IDR3K rise in blended average revenue per user (ARPU) to IDR33K. Data share of 4QFY18 service revenue continues to climb to 86% from 77% in 1QFY18, up from 63% in 1QFY17.

• The higher data revenue provides greater resiliency against the backdrop of declining voice usage while the earlier prepaid sim registration has led to lower churn rates, moderating competition at this stage.

• XL’s FY19F guidance for revenue growth projection remains “better than or at least in line with market”, EBITDA margin in the high 30s and capex at IDR7.5tril (+10% YoY). 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 profit sustainability may be constrained by competitive pressures over the longer term, while faster growing ex-Java revenues deliver lower EBITDA margins.

• Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs. Maxis’ 13x amid reduced overseas risk exposure if the merger with Telenor’s Asia operations materialises. Nevertheless, the government’s intention to reduce Khazanah Nasional’s holdings in GLC-linked companies casts shadows of a share overhang.

Source: AmInvest Research - 6 May 2019