Investment Highlights

• We maintain HOLD on Axiata Group (Axiata) with an unchanged SOP-based fair value (FV) of RM2.95/share, which was recently raised to account for the group’s 66.5%-owned XL Axiata’s (XL) higher market capitalisation. This implies FY24F EV/EBITDA of 5x, in line with its 5-year average. Our FV reflects a neutral 3-star ESG rating.

• We increased Axiata’s FY23F-FY25F earnings by 9%-27% to account for XL’s commendable FY23 net profit of IDR1.28tril (+15% YoY), 14% above our estimate but 4% below street’s.

• The upbeat results stemmed mainly from an impressive revenue growth of 12% YoY from a successful monetisation strategy encompassing price adjustment of starter packs and enhanced digital customer experience. The number of monthly active users of myXL apps and AXISnet apps doubled to 29mil users from 15mil in 2021, supporting a healthy traffic growth of 21% YoY and retention of 58mil quality subscribers.

• YoY, XL’s average revenue per user (ARPU) increased by 8% to IDR43k against the backdrop of XL Satu’s home subscribers increasing +91% YoY to 235k with the acceleration of coverage penetration which increased to 75% in FY23 from 37% in FY22. Hence, XL Satu’s coverage substantially widened to 86 cities from 30 cities in FY22.

• QoQ, XL’s 4QFY23 PATAMI slid 26% to IDR266bil despite a revenue growth of 4% due to an IDR88bil one-time prior tax adjustment in 4Q2023, in addition to a higher infrastructural charge (+12% QoQ) and overhead cost (+174% QoQ). This was partly offset by improved blended ARPU by IDR1k to IDR43k (+2.4% QoQ).

• For FY24F, XL is guiding for high-single digit revenue growth, EBITDA margin of 50% and capex of IDR8tril. Nevertheless, the guidance does not take into account the upcoming contribution from LinkNet’s retail broadband subscribers. XL’s acquisition of LinkNet’s 750k retail broadband customers is still subject to OJK’s approval and slated to be completed in 1H24.

• With XL accounting for 17% of Axiata’s SOP, we view the group as a regional operator with excellent prospects of monetising its multiple businesses. However, we remain cautious on Axiata’s prospects amid rising rising macro-economic headwinds as group’s finance costs would still increase due to additional debt financing for Link Net’s fibre rollout, digital banking start-up losses and capex expansion of edotco in Philippines.

• The stock looks fairly valued trading at 5x EV/EBITDA, at parity to its 5-year historical average, especially given potential near- term downside earnings risks.

Source: AmInvest Research - 14 Feb 2024