• 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 FY21F EV/EBITDA of 5x – 1 standard deviation below its 3-year average of 6x.
• Axiata’s FY20F–FY22F earnings are maintained following the group’s 66.5%-owned XL Axiata’s (XL) 9MFY20 normalised profit of IDR513bil coming in line with our expectations and accounting for 64% of our FY20F earnings of IDR801bil. However, as our unchanged FY20F net profit for the Indonesiabased XL is half of consensus, the result is way below street’s expectation of IDR1,650bil.
• At the operating level, XL’s 9MFY20 EBITDA of IDR9.9tril is also in line with our expectation, accounting for 75% our FY20F EBITDA of IDR13.2tril vs. 72%–75% over the past 3 years.
• XL registered a 35% YoY growth in 9MFY20 EBITDA, driven by a one-off IFRS 16 lease accounting adjustment of IDR1.3tril and an 8% increase in registered service revenue. This was further supported by a substantive 14% drop in operating expenditure, a 1.4mil YoY increase in subscribers and IDR2K/month rise in blended average revenue per user (ARPU) to IDR36K/month.

• The trajectory of lower operational expenditure is highlighted in XL’s 3QFY20 normalised net profit, which surged 2.7x QoQ to IDR331bil mainly due to a 15% QoQ reduction in infrastructural expenses on lowered tower rental reversions together with a 5% QoQ contraction in depreciation charges.

• The group’s 3QFY20 net revenue was flat as service revenue slid marginally by 0.4% QoQ to IDR6.1tril even though prepaid subscribers increased by 1.2mil QoQ to 55.7mil from stronger ex-Java growth while the postpaid segment was flat at 1.1mil. This stemmed from its blended average revenue per user (ARPU) declining by IDR1K/month to IDR36K/month as both prepaid and postpaid ARPU dropped to IDR35K/month and IDR110K/month respectively.

• Voice revenue continues to fall as the proportion of data-toservice revenue rose to 92.7% in 3QFY20 from 91.9% in 2QFY20 and 89.7% in 3QFY19. This provides greater resiliency against the global trajectory of declining voice usage as competition is intensifying with other operators launching more aggressive unlimited data and bundling plans.

• Amid the Covid 19 pandemic which continues to cloud management guidance, the group’s tower expansion slowed to 2% QoQ to 143K as 3QFY20 capex dropped by 32% QoQ to IDR1.3tril. We expect XL’s spending to remain cautious with its 9MFY20F capex of IDR5.1tril accounting for only 68% its earlier FY20F target of IDR7.5tril.

• With XL accounting for 11% of Axiata’s SOP, we view the group as a regional operator with excellent prospects of monetising its multiple businesses. The stock currently trades at a bargain FY21F EV/EBITDA of 4x vs. Maxis’ 13x.

Source: AmInvest Research - 6 Nov 2020