Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.30/share, which translates to an FY18F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel).

• Axiata’s 66.5%-owned XL Axiata’s (XL) 9MFY17 normalised net profit of IDR338bil (vs a loss of IDR85bil in 9MFY16) was way above expectations, coming in ahead of our earlier full year FY17F of IDR164bil and street estimates’ IDR309bil. This stemmed from stronger than expected subscriber growth and positive tax charge.

• Hence, our FY17F-FY19F earnings forecasts for XL, which account for 13% of Axiata’s SOP, have been raised by 32%- 185% from 7k and 350k increases in our postpaid and prepaid customer assumptions respectively, together with a 1ppts improvement in EDITDA margin in FY17F. This translates to a 4%-7% increase in Axiata’s FY17F-FY19F earnings.

• Indonesia-based XL’s revenue momentum continues to gain traction, as 3QFY17 service revenue resumed its upward momentum to 5% QoQ (vs 9% QoQ in 2QFY17), supporting the overall growth of 5%, and underpin a reversal of the group’s declining revenue trajectory since 2QFY14. This was driven by a 2mil increase in subscriber base to 52.5mil while blended ARPU slid by IDR1k/month to IDR34k/month.

• As the prepaid segment accounts for 99% of XL’s subscriber base, the increase in subscriber base came mostly from prepaid subscribers which rose 2mil (+4%) QoQ to 51.9mil while postpaid segment also grew at a faster pace of 49K (+8%) to 631K. Data share of service revenue continues to rise to 71% in 3QFY17 from 67% of 2QFY17, up from 51% in 3QFY16.

• On a QoQ basis, XL's 3QFY17 EBITDA margin rose 1.6ppts to 38% due to the stronger revenue, partly offset by a 3% increase in cost of sales driven by infrastructure spending to expand the group’s base stations. Hence, XL’s 3QFY17F normalized net profit rose 2.4x QoQ and 2.7x YoY to IDR224bil.

• XL's revenue growth has finally caught up with its dual-brand transformation programme focused on improving 4G adoption rates through increased coverage, modernising distribution channels via partnerships together with traditional outlets, and building online video content and data promotions.

• Nevertheless, we are still watchful on XL’s sustainability in driving revenue growth as the group’s monetisation capability may be constrained by rising competitive pressures over the longer term, while faster growing ex-Java revenues could deliver lower EBITDA margins.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, way below its 2-year average of 8.1x and less than half of SingTel's 14x. We continue to be bullish on the stock on expectations of a value-enhancing re-merger with TM, which will continue the re-rating process to bridge the valuation gap with SingTel.

Source: AmInvest Research - 1 Nov 2017