Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with a higher sum-of-parts-based fair value of RMRM6.40/share (from an earlier RM6.30/share), which translates to a rolled forward FY19F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel).

• Axiata’s FY17F-FY19F earnings have been cut by 8%-11% as we have lowered its 66.5%-owned XL Axiata’s (XL) net profit by 30%-40% due to a 1%-point cut in our EBITDA assumptions to 36%. Our forecasts are now 16%-17% below consensus.

• Indonesia-based XL’s FY17 normalised net profit of IDR740bil (vs a loss of IDR209bil in FY16) appears above expectations, coming in 42% above our forecast of IDR522bil and double street’s IDR377bil. This stemmed from the positive tax charge of IDR154bil, vs normal rates in our assumptions.

• However, XL’s FY17 EBITDA is 7% below our forecast and 3% below consensus, while pre-tax profit was half of our earlier estimate due to higher operating costs, which rose 10% YoY and led to a 1.4%-point decline in EBITDA margin. This partly stemmed from the government’s sim registration programme, which requires all prepaid sim card users to register with their identification from 31 October 2017 until 28 February this year.

• Our FY18F-FY20F effective tax rate assumptions for XL, which currently accounts for 10% of Axiata’s SOP, are maintained at 25% despite positive tax charges for the past 3 years as its past losses have been almost fully utilized.

• Despite the weaker than expected bottomline, XL’s 4QFY17 service revenue resumed its upward momentum to 1% QoQ (vs 5% QoQ in 3QFY17), supporting the overall FY17 growth of 8%, and underpin a reversal of the group’s declining revenue trajectory since 2QFY14. This was driven by a 7mil YoY increase in subscriber base to 53.5mil while blended ARPU slid by IDR2k/month to IDR33k/month.

• The sim registration requirement appears dampened the sector’s subscriber growth as XL’s 3QFY17 prepaid card QoQ accretion slowed down to only 900k from 2mil in 2QFY17 and 2.5mil in 1QFY17. The postpaid segment, which were spared this administrative hassle, grew at a faster pace by 72K (+11%) to 703K. Data share of service revenue continues to rise to 75% in 3QFY17 from 71% of 3QFY17, up from 58% in 4QFY16.

• While XL's revenue growth continues to be underpinned by its dual-brand transformation programme under XL and Axis, its sustainability may be constrained by rising competitive pressures over the longer term, while faster growing ex-Java revenues could deliver lower EBITDA margins.

• Nevertheless, we continue to be bullish on the stock on the prospects of a value-enhancing re-merger with TM, which will continue the re-rating process to bridge the valuation gap with SingTel. Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8.1x and half of SingTel's 14x.

Source: AmInvest Research - 2 Feb 2018