Results 

On  the  back  of  ID17,541.0bn  turnover,  XL  recorded  a  core net  loss  of  ID250.0bn,  not  comparable  to  consensus ’  full year estimate of IDR448.6bn  profit.

One-off  adjustments:

1.  Unrealized  FOREX  loss amounted  to IDR869bn;  and

2.  Tax impact of  IDR217bn.

Deviations

• Below expectations due to losses from Axis.

Highlights 

Sales  expanded  11%  yoy  as  all  product  segment  registered healthy  growths  led  by  data  with  43%  yoy  and  followed  by VAS,  voice  and  SMS  with  42%,  4%  and  4%  yoy, respectively.

Data’s  contribution  to  overall  revenue  edged  up  5-ppt  yoy  to 28%  as  traffic  increased  135.6%  yoy  with  total  data  users reached  31.2m or 53% of the total base of 58.3m.

Smartphone  users  grew  significantly  by  58%  yoy,  reaching 14.6m users or 25% of the total base.

EBITDA  margin  declined  from  40%  to  36%  due  to  bleeding Axis.  XL  relentlessly  creates  further  cost  management improvements  to  turnaround  Axis  and  to  date,  it  has successfully  slashed  that  by  70%.  Axis  is  expected  to  be EBITDA  neutral by 1Q15.

XL  has  installed  15.4k  NodeBs  as  of  3Q14  bringing  total number  of  2G  and  3G BTS to 49.6k.  These has equipped XL with 2G and 3G coverage  of >90% and >40%, respectively.

After  the  sale  of  3.5k  towers  to  STP  which  is  expected  to conclude  by  Dec  2014,  XL  has  yet  to  decide  on  the  faith  of the  remaining  6.5k  towers.  Nonetheless,  XL  did not discount the possibility of disposal to further  pare  down debts.

XL  plans  to  return  the  block  of  2x10MHz  on  2100MHz spectrum  which  was  acquired  from  Axis  to regulator by next month  upon  successful  network  migration.  This  will  result  in cost savings going forward.

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 3Q14 results announcement.

Rating

HOLD, TP: RM6.92

• Positives  –  mobile  internet  growth,  margin  improvements through  collaborat ions/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

Source: Hong Leong Investment Bank Research - 30 Oct 2014