Results

On the back of ID11,595.0bn turnover, XL recorded a core net loss of IDR501.0bn, not comparable to consensus’ full year estimate of IDR2,732.4bn profit.

One-off adjustments:

1. Unrealized FOREX gain amounted to IDR25bn; and

2. Tax impact of IDR6bn.

Deviations

Below expectations due to losses from Axis.

Highlights

Sales expanded 12% yoy as all product segment registered healthy growths led by data with 45% yoy and followed by VAS, voice and SMS with 20%, 5% and 5% yoy, respectively. This also marked the first full quarter consolidation of Axis’ financials.

Data’s contribution to overall revenue edged up 6-ppt yoy to 28% as traffic increased 158% yoy with total data users reached 32.2m or 51% of the total base of 62.9m.

Smartphone users grew significantly by 49% qoq, reaching 13.3m users or 21% of the total base.

EBITDA margin declined from 40% to 37% due to bleeding Axis. XL relentlessly creates further cost management improvements to turnaround Axis and to date, it has successfully slashed that by 60%.

XL has installed 15.2k NodeBs as of 2Q14 bringing total number of 2G and 3G BTS to 47.8k. These has equipped XL with 2G and 3G coverage of >90% and >40%, respectively.

XL is reviewing the possibility of 3G over 900MHz to meet the rising data demand in sub urban or rural areas. Trials have been completed and in depth evaluation is underway to ensure no interference created.

Ongoing corporate exercises include selling its treasury shares amounted to 231m shares and disposing its telco towers through tender to pare down debts.

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 pending analyst briefing in conjunction with Axiata’s 2Q14 results announcement.

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- 22 Aug 2014