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 FY21F EV/EBITDA of 5x – 1 standard deviation below its 3-year average of 6x.

• Axiata’s FY20F–FY22F earnings have been slightly lowered by 3%–4% mainly from higher one-off depreciation adjustments for the group’s 66.5%-owned XL Axiata (XL) FY20. This stems from XL’s FY20 normalised profit of IDR679bil coming in below expectations – 8% below ours and 65% of consensus. As we had highlighted, our more conservative FY20 earnings for XL were already half of street’s.

• The weak results stemmed mainly from one-off IFRS 16 lease accounting adjustments which drove up depreciation charges by 69% YoY to IDR12.5tril and net interest charges by 20% YoY to IDR2.2tril. However, XL’s pre-IFRS normalised net profit of IDR852bil was 15% above our forecast but 56% below consensus. Hence, at the operating level, XL’s FY20 normalised EBITDA of IDR13.1tril (+31% YoY) was instead in line with our and market’s expectation.

• XL’s 4QFY20 EBITDA slid 7% QoQ to IDR3.2tril due to a 4% QoQ decline in service revenue as the prepaid segment’s average revenue per user (ARPU) decreased by IDR2K to IDR33K, partly offset by subscribers increasing by 1mil to 57.9mil. The higher depreciation charges and interest costs from IFRS 16 adoption caused XL’s 4QFY20 normalised net profit to halve QoQ to IDR166bil.

• The group’s net subscriber acquisitions continue to be driven largely by the prepaid segment, as the postpaid users rose by only 10K QoQ to 1.2mil, accounting for 2% of subscribers. Pricing competition amid weak consumer spending power due to the Covid-19 pandemic caused 4QFY20 data revenue to slide 4% QoQ to IDR5.4tril, slightly dampening data service revenue to 92.6% in 4QFY20 vs. 92.7% in 3QFY20, after rising significantly from 88.7% in 4QFY19.

• Amid the merger plans between Indosat and PT Hutchison 3, management expects XL’s FY21F revenue to trend in line with the market’s low single-digit growth expectations with EBITDA margins in the low end of 50%, similar to 50% in FY20.

• However, XL’s FY21F capex is expected to be lower at IDR7tril vs. IDR7.8tril last year, which should be easily funded internally as the US$296mil sale of 2,782 towers has partly cut net debt/EBITDA to 0.5x from 1.1x in 4QFY19. Amid the Covid- 19 pandemic, the group’s 4QFY20 tower footprint still increased by 2,380 sites or 2% QoQ to 144,978 sites mainly for 2G (+4% QoQ) and 4G (+2% QoQ).

• With XL accounting for 8% 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 - 16 Feb 2021