Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts based fair value of RM4.90/share. This implies an FY20F EV/EBITDA of 5x, which is 2 SDs below its 2- year average of 7x.

• We have fine-tuned Axiata’s FY19F–FY21F earnings as the group’s 66.5%-owned XL Axiata’s (XL) FY19 pretax profit of IDR1,144bil was in line with our forecast, even though exceeding consensus estimate by 32%. XL’s FY19 EBITDA of IDR9,966bil was in line with both our and consensus’ estimates.

• However, XL’s normalized FY19 net profit of IDR719bil was 12% below our forecast due to the 21-percentage point (ppt) YoY increase in 4QFY19 effective tax rate to 45%. As a comparison, XL’s normalized net profit was 13% above consensus.

• While XL registered a record FY19 revenue of IDR25tril (+9% YoY), its 4QFY19 revenue dipped by 1% QoQ after 3 consecutive quarterly expansions on a contraction in service revenue and lower interconnection fees.

• EBITDA margin rose slightly by 0.4ppt QoQ to 41% due to the revenue dip as well as operating expense decline of 1% QoQ to IDR3,804bil. This stemmed from an 8% fall in interconnection charges and 2% reduction in infrastructure expenses.

• XL’s lower 4QFY19 service revenue appears to stem from an IDR2K QoQ decline in postpaid average revenue per user (ARPU) to IDR109K, as prepaid ARPU stabilized at IDR34K while overall subscriber rose by 1.2mil QoQ to 56.7mil. Nevertheless, data share of service revenue continued to rise to 91% in 4QFY19 from 82% in 4QFY18.

• 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. However, competition is intensifying as other operators have become more aggressive in launching more affordable packages.

• Hence, XL’s FY20F guidance is more cautiously optimistic with an “in line with market” revenue growth outlook vs. the earlier ‘better-than-market” FY19 outlook. The group is still highly cost conscious with an EBITDA margin guidance of low-40% compared with 40% in FY19 while capex is expected to be flattish YoY at IDR7.5tril. We expect the larger portion of capex to be earmarked for outside of Java as the group leverages 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 rising competitive pressures over the longer term, while faster growing ex-Java revenues deliver lower EBITDA margins. We will provide further updates following a teleconference tomorrow evening.

• For a regional operator with excellent prospects of monetizing its multiple businesses, Axiata currently trades at a bargain FY20F EV/EBITDA of 5x vs. Maxis’ 13x.

Source: AmInvest Research - 10 Feb 2020