Results

On the back of IDR5,526bn turnover, XL recorded a core net loss of IDR14bn, not comparable to consensus’ full year estimate of IDR779.1bn profit.

However, we consider this to be largely in line as we expect stronger earnings ahead with Axis’ full integration and cost reduction via streamlining and leveraging on XL’s cost structure.

One-off adjustments:

1. Unrealized FOREX gain amounted to IDR524bn; and

2. Tax impact of IDR131bn.

Deviations

Largely in line.

Highlights

Sales expanded 10% yoy as all product segment registered healthy growths led by data with 30% yoy and followed by VAS, voice and SMS with 19%, 3% and 2% yoy, respectively.

Data’s contribution to overall revenue edged up 2-ppt yoy to 26% as traffic increased 176% yoy with total data users reached 37.5m or 55% of the total base of 68.5m.

Smartphone users grew significantly by 33.3% qoq, reaching 13.6m users or 20% of the total base

EBITDA margin was unchanged yoy at 40% as OPEX increased by 11% yoy mainly due to the increase in number of leased sites / infrastructure in line with expansion plan as well as additional sites from Axis. Furthermore, there was an increase in managed services and frequency fees in the enlarged entity.

XL has installed 14.9k NodeBs as of 1Q14 bringing total number of 2G and 3G BTS to 45.6k. These has equipped XL with 2G and 3G coverage of >90% and >40%, respectively.

This set of result has taken into account of 12 days impact of Axis consolidation. To date, it has completed the integrations of workforce, channel and distribution. In addition, >50% of Axis subscribers have been successfully migrated to XL’s billing system while >40% of Axis’ traffic footprint has been smoothly cutover as well. In turn, Axis’ OPEX has been reduced by ~40% since October 2013.

Catalysts

• Higher smartphone penetration boosting data ARPU.
• Strong growth in low penetration developing markets.
• More cost savings from collaboration with DiGi.

Risks

Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

Unchanged.

Rating

HOLD, TP: RM6.92

Positives – mobile internet growth, margin improvements through collaborations/sharing, recoups prepaid tax via GST, unlock value through tower listing.

Negatives – Challenging operating environment in Indonesia, Axis to weigh down XL in the short term, OTT substituting voice and SMS, unable to monetize data.

Valuation

Maintain HOLD with unchanged SOP-derived TP of RM6.92 (see Figure #2).

Source:Hong Leong Investment Bank Research- 15 May 2014