- We maintain our BUY call on Axiata at unchanged fair value of RM7.90/share following the release of XL’s (66.5% owned Indonesian unit) 3Q13 results.

- XL’s 3Q13 results were stronger than expected accounting for 85% of our FY13F earnings, but within street estimates accounting for 73% of consensus earnings. Given the significant IDR weakness in 3Q13 however, we would expect a squeeze on earnings translation at Axiata level.

- XL reported core net profit of IDR748bil for its 3Q13, which brought 9M13 core earnings to IDR1,497bil. XL’s 3Q13 earnings represented a massive 73% QoQ growth and underpin our view that XL’s earnings has reached an inflection point since 2Q13.

- EBITDA margins continued its gradual recovery to 40.9% (from 40.6% in 2Q13 and 40.3% in 1Q13). The 52% YoY earnings contraction seen in 1H13 has moderated significantly to -35% in 3Q13. On YTD basis, EBITDA is still down by 14% (versus -16% in 1H13) given the impact of SMS interconnect since June 2012 (i.e. only 3 months impact in 9M12) and aggressive expansion of 3G coverage (expansion of leased sites) which impacted infra cost. Excluding the impact of SMS interconnect, EBITDA margin would have registered at 44% (vs. reported 41%).

- FY13 revenue growth guidance was revised down to low single digit from mid-single digit growth guidance three months ago. As of 9M13, XL achieved revenue growth of just 0.7%, though this reflects mainly the weak revenue growth trends in 1Q13 and the gradual recovery that came afterwards.

- Nonetheless, net addition trend continues to improve after having been hit by price competition in 3Q12-4Q12 period, which triggered XL’s own price cutting moves in late 4Q12 till 1Q13. The improvement in subscriber net additions (See Chart 2), coupled with improving margins from a less aggressive stance on capex from this year onwards, provides a solid basis for further core earnings recovery going forward.

- The next catalyst would be the acquisition of Axis, and more importantly, execution of integration between the two telcos. Lower capex and an improved pricing environment arising from the acquisition are 2 key positives to look out for, but in the immediate-term, XL’s earnings will likely be diluted as Axis is deeply loss making.

Source: AmeSecurities