- We maintain our BUY call on Axiata with an unchanged FV of RM6.90/share. Axiata’s Indonesian unit, XL Axiata, released its 1Q13 results yesterday. The group registered EBITDA and net profit of IDR2tril and IDR316bil, respectively. Topline, EBITDA and earnings accounted for 21%, 20% and 10% of our projections, respectively, but we maintain our numbers on expectations of better quarters ahead.

- Revenue growth slowed to 2% YoY due to a decline in national roaming, while termination of tower leasing arrangement affected infra revenue. Overall, voice and SMS revenue declined 11% and 6%, but offset by higher data revenue (+19%). EBITDA margin shrunk to 40% (1Q12: 49%) due to:- (1) SMS interconnect impact; (2) Increased network cost due to aggressive data network rollout; (3) Downward price adjustments since 4Q12; (4) Change in revenue mix – higher data revenue.

- Heavy depreciation charges and network cost from aggressive 3G rollout over the past 12 months dragged 1Q13. While revenue typically lags network cost increases, aggressive price competition exacerbated the situation. The group is looking at a much better 2H13, which will be driven by several factors:-

- (1) Looking to increase price points gradually. Tweaks in price points in 4Q12 have improved brand perception on XL which is now seen as a “value” brand instead of an “affordable” brand – the group is now in a better position to adjust for pricing higher. Management also thinks 4Q12 price cuts were enough to stabilise net addition trends, while volume improved significantly (See Table 3). XL subs traction was badly hit in 2Q-3Q12 due to price aggression by smaller peer, Hutch (at the lower end of the market).

- (2) Volume trends have rebounded significantly since Feb 2013. Management is maintaining revenue guidance to grow on par with, or slightly better than, industry (Industry: +7% to 8% YoY), which implies much stronger revenue growth in the quarters ahead (vs. +2% YoY in 1Q13).

- (3) Capacity growth is expected to be slightly lower than FY12. Management is still maintaining capex guidance of IDR7-8tril at this juncture, but priority now is on improving capacity utilisation. Given high operating leverage, the strategic change in focus should boost margins significantly.

- Management views that industry consolidation is imminent, price competition triggered by smaller players in the past year will badly affect earnings of these players. XL does not mind initiating the consolidation provided a business case is viable. This could turn out to be a strong catalyst should it materialises.

Source: AmeSecurities