Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with a lower sum-of-parts-based fair value of RM6.05/share (from an earlier RM6.20/share), which translates to an unchanged FY19F EV/EBITDA of 6.5x, 1 SD below its 3-year average of 7.5x.

• We have reduced Axiata’s FY18F-FY20F earnings by 8%-9% from an 82%-88% cut in its 66.5%-owned XL Axiata’s (XL) earnings as XL’s 1HFY18 normalised loss of IDR64bil was worse than expectations. As a comparison, our estimate for XL FY18F earnings was IDR596bil and street’s IDR579bil.

• Even though we had forewarned that XL’s bottom line is still at a volatile recovery phase back in May this year amid an ongoing prepaid SIM card registration campaign, XL’s regression to a 2QFY18 normalised loss of IDR84bil from a 1QFY18 net profit of IDR20bil was still a surprise.

• The loss stemmed largely from an interest cost increase of 11% QoQ, RM43mil realised forex loss and normalisation of tax rate as 1QFY18 enjoyed a positive charge of IDR86bil.

• On a positive note, XL’s EBITDA margin was stable at 36% while revenue increased by 1% QoQ, driven by the IDR2K/month improvement in prepaid average revenue per user (ARPU) to IDR31K/month and an 87K increase (+11% QoQ) in postpaid subscribers, largely partly offset by a 1.7mil decline in prepaid subscribers to 52mil and IDR6K/month decrease in postpaid ARPU to IDR100K/month.

• We are not surprised by the overall 1.6mil contraction (-3% QoQ) in subscriber base to 52.9mil given 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 for SIM cards that have not been re-registered.

• However, we expect XL’s revenue momentum to regain traction as subscriber growth normalise following the completion of the prepaid SIM registration exercise together with the expected normalisation of sales and marketing costs of 9% of service revenue, down from 11% in 1HFY18.

• XL’s postpaid segment, which was spared this administrative hassle, grew at a faster pace by 53% YoY in 2QFY18 to 891K. Data share of service revenue continues to rise to 79% from 77% in 1QFY18, up from 63% in 1QFY17.

• 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.

• XL’s share price has declined since the past quarter, contributing to its proportion in Axiata’s SOP decreasing from 10% to 9%. Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, way below its 3-year average of 7.5x and half of Singapore Telecommunications' 12x.

Source: AmInvest Research - 31 Jul 2018