- Maintain BUY on Axiata with an unchanged SOP-derived FV of RM7.30/share following the release of XL’s (67% owned Indonesian unit) result yesterday. Revenue and EBITDA were slightly weaker than expected at 40% and 41% of estimates, respectively. Nonetheless, XL’s 2Q13 marked an important inflection point having seen deterioration in the past four quarters. 2Q13 earnings improved by 37% QoQ while EBITDA returned to a positive growth of 6% QoQ (EBITDA margin +0.3pp QoQ at 40.6%).

- XL is now gaining revenue share (after lagging peers since 1Q12), having outstripped competitors’ growth in 2Q13 – XL’s at +4.9% QoQ vs. Indosat’s +1.5% QoQ and Telkomsel’s +4.4% QoQ. XL managed to arrest the churn in the subscription base having registered a 5mil net add in the quarter.

- Management lowered its revenue growth guidance (to “mid-single digit” from “in-line with industry”), but maintained margin guidance. The tone now is that XL is less aggressive in tweaking up absolute price points (having done that in February 2013). ARPU is still expected to increase but primarily by taking out more freebies from the current offerings and stimulating usage. Margins guidance is maintained despite the lower revenue growth guidance given lower capex expectations.

- Growth trajectory for both revenue and margins are expected to improve further. Revenue growth is expected to increase to +5% YoY (from +2% YoY as of 1H13), partly due to a weak base in 2H12. Margins are expected to improve to c.46% (from 40.5% in 1H13). The positive operating leverage from improving capacity utilisation and less aggressive infra cost buildup should drive margins upside. Capex guidance is lowered to IDR7-8tril (from IDR8-9tril earlier) given a more conservative stance on 3G rollout – we have currently modelled for an IDR8tril capex for FY13F.

- Regarding a potential acquisition of Axis, both parties (XL and Saudi Telco) have been looking at it seriously for quite some time and are in the midst of working out solutions in valuation vs. components in Axis that comes with a potential deal. Management indicated that with an additional 10-15MHz spectrum, it can lower capex by a substantial 40%-50%. Approval received from the ministry is specifically for potential acquisition of Axis, but management does not rule out other potential transactions taking place.  

Source: AmeSecurities