Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM4.50/share, which implies an FY20F EV/EBITDA of 5.3x – 1 standard deviation below its 3-year average of 6x.

• We have lowered Axiata’s FY20F–FY22F earnings, which are already 9% below consensus, by 4%–6% as the group’s 66.5%- owned XL Axiata’s (XL) 1HFY20 normalised profit of IDR182bil came in below expectations, accounting for 16% of our earlier full-year forecast and 14% street’s. As a comparison, XL’s 1HFY19 accounted for 41% of FY19 net profit.

• We have raised our depreciation charge assumptions to 20% from 17% earlier and interest costs by 2 basis points for XL, translating to an 18%–28% cut in XL’s FY20F–FY21F earnings.

• XL, which accounts for 11% of Axiata’s SOP, registered a 38% YoY decline in 1HFY20 normalised earnings largely due to a 43% surge in depreciation to IDR5bil while net interest expense increased to IDR1.2bil.

• These additional costs more than offset XL’s EBITDA margin increase of 11ppt to 50%, which benefited from an IFRS 16 lease accounting adoption, a 23% fall in infrastructural expenses and 21% decrease in inter-connection/direct costs. However QoQ, XL’s performance is improving with 2QFY20 normalised net profit doubling to IDR124bil from a 3% rise in service revenue together with a 1ppt improvement in EBITDA margin.

• XL’s higher 2QQFY20 service revenue stems from a 190K QoQ increase in subscribers to 55.7mil while average monthly revenue per user (ARPU) rose by IDR1K QoQ to IDR37K. This is largely supported by data share of service revenue continuing to rise to 92% in 2QFY20 from 88% in 2QFY19 with traffic rising 49% YoY.

• 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 some forms of unlimited data plans.

• Despite the Covid-19 pandemic, the group’s 1HFY20 capex rose 4% YoY to RM3.7bil, in line with XL’s earlier FY20F target of 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 revenue, which accounts for 25% of the group, is still operating below breakeven currently.

• For a regional operator with excellent prospects of monetising its multiple businesses, Axiata currently trades at a bargain FY20F EV/EBITDA of 4x vs. Maxis’ 13x.

Source: AmInvest Research - 27 Aug 2020