Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RMRM6.60/share, which translates to a rolled forward FY19F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel).

• Axiata’s FY17F-FY19F earnings are maintained as its 66.5%- owned XL Axiata’s (XL) results came in within expectations, accounting for 22% of our FY18F EBITDA and 21% of consensus, similar to 1QFY18. XL accounts for 10% of Axiata’s SOP.

• Even though XL’s 1QFY18 core net profit of IDR20bil represented only 4% of our FY18F forecast, we note that its bottom line is still at a volatile recovery phase, with 1QFY17 accounting for only 3% of FY17 core earnings. Note that our conservative FY18F-FY20F XL earnings are 25%-40% below consensus.

• XL’s 1QFY18 EBITDA slid 6% QoQ due to the 8% contraction in revenue, driven by the IDR4K/month decline in average revenue per user (ARPU) to IDR30K/month, partly offset by a 1mil increase (vs. +972K in 4QFY17) in subscribers to 54.5mil. This contributed to the drastic 92% plunge in core net profit.

• However, we expect XL’s core earnings momentum to regain traction as subscriber growth normalise following the completion of the pre-paid SIM registration exercise together with sales and marketing costs to 7%-8% from 10% in 1QFY18.

• We view XL’s 1QFY18 increase in subscribers as commendable against the background of the government’s SIM registration programme, which requires the registration of all prepaid SIM card users from 31 October 2017 to 1 May this year, with outgoing calls and text messages being blocked last month for those SIM cards that have not been re-registered.

• XL’s postpaid segment, which was spared this administrative hassle, grew at a faster pace by 101K (+14%) to 804K in 1QFY18 vs. +72K in 4QFY17. Data share of service revenue continues to rise to 77% from 75% in 4QFY17, up from 63% in 1QFY17.

• Despite the lower revenue, XL’s 1QFY18 EBITDA margin rose 0.6ppt QoQ to 36% mainly from the seasonal halving of salaries, as the group paid out bonuses in 4QFY17.

• On a YoY comparison, XL’s core net profit was flat as its 5% rise in revenue was offset by the 10% increase in depreciation in tandem with the 18K (+21% YoY) tower station expansion.

• 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 deliver lower EBITDA margins.

• We continue to be bullish on Axiata’s prospects for 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 6x, way below its 2-year average of 8.1x and half of SingTel's 14x.

Source: AmInvest Research - 14 May 2018