Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with unchanged forecasts and sum-of-parts-based (SOP) 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.

• Following the teleconference with the management of the group’s 66.5%-owned XL Axiata, we remain cautiously optimistic on the Indonesia-based cellular operator which accounts for 13% of Axiata’s SOP. These are the highlights of the teleconference:

• Competition is intensifying in Indonesia with 3 operators recently launching unlimited data packages together with more affordable products. These include the largest operator PT Telekomunikasi Selular (Telkomsel) as well as PT Indosat and CK Hutchison’s 3.

• While offering unlimited YouTube during restricted hours, XL currently does not offer unlimited data packages nor aims to be the first mover in a price war. Hence, XL is guiding for a more moderate “in line with market” revenue growth FY20F outlook vs. “betterthan-market” in FY19.

• As data share of service revenue continued to rise to 91% in 4QFY19 from 82% in 4QFY18, management is monitoring the rising competition closely to adjust its marketing plans.

• Management’s FY20F EBITDA margin guidance of low 40% vs. 40% in FY19 stems from expectation of revenue growth and operational efficiencies. However, as post-IFRS 16 for lease accounting impact will have a positive impact EBITDA, XL expects margins to be higher at mid-40%.

• XL’s 4QFY19 effective tax rate surged to 45% from 24% in 4QFY18, while registering 32%–36% in 1Q–3QFY19. This stemmed from the expiry of non-deductible tax losses from the Axis acquisition back in 2014. For FY20F, management guided for an effective tax rate of 30% vs. 25% in FY19.

• The group’s IDR7tril capex will focus on fiberising and expanding its tower sites, which have increased 10% YoY to 130,217 base stations as at 4QFY19. The group will continue to shift its 2G and 3G stations, which account for 69% of its portfolio, towards 4G to meet escalating data traffic.

• While half of XL’s FY20F capex will be earmarked for Java, its subscriber growth is expected to be faster ex-Java given the lower base amid the largely unreached regions. Management has tightened its investment criteria for shorter payback of 3–4 years for ex-Java expansions.

• In its third tower sale which could deleverage its net debt/FY20F EBITDA of 1.1x to a more accommodative 0.7x, XL has sold and leased back 2,782 telecommunications towers for IDR4.1bil (RM1.2bil) to PT Profesional Telekomunikasi Indonesia (Protelindo) and PT Centratama Menara Indonesia via tender. Leasing these units for 10 years, XL continues to own 1,600 towers and has indicated no plans for future disposals.

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

Source: AmInvest Research - 12 Feb 2020