Results

• On the back of IDR5.5tr turnover, XL recorded a core net loss of IDR79.0bn, not comparable to consensus’ full year estimate of IDR859.6bn profit.

• As highlighted in our report titled “No Pain, No Gain” dated 2 Apr, this weakness is due to XL’s landmark shift in strategy from volume to value which will lead to near-term impact.

Deviations

• Lower-than-expected sales due to removal of non-profitable subscribers as well as general retail slowdown.

Highlights

• Sales was flat yoy as solid expansions in data (+29%) and VAS (+42%) was mitigated by the contraction in SMS (-8% yoy), while voice remained unchanged yoy.

• Data’s contribution to overall revenue edged up 6-ppt yoy to 32% as traffic almost doubled yoy to 43.4PB.

• Smartphone users grew significantly by 54% yoy, reaching 17.2m users or 33% of the total base. While smartphone is data’s main growth driver, it has also persistently eroded SMS revenue as users migrate to OTT platforms.

• EBITDA margin slipped by 6-ppt yoy to 34% as infrastructure expenses rose 25% yoy due to higher rental expenses and frequency costs despite sales and marketing (S&M) costs savings of 22% yoy. The lower S&M costs are attributable to more effective commission structure to lure valuable subs.

• Continue to invest to provide high quality internet services by adding 3G and 4G nodes by 425 and 180, respectively in 1Q15. This brings total base stations to circa 53k.

• Not comfortable of its debt profile which skewed towards USD and will explore ways to pare them down. Disposal of the remaining 6.5k towers remains an option to achieve that.

• As new strategy would take 12-18 months to complete, XL would not be meeting the previous revenue guidance but EBITDA margin is expected to be mid to high 30’s as before. CAPEX has also been toned down to IDR6tr by relocating duplicated sites from Axis to increase productivity.

• Believes that 1Q15 is the bottom and will gradually improve with a stronger turnaround in 2H15.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and listing of Robi.

Risks

• Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

• Unchanged pending analyst briefing in conjunction with Axiata’s 1Q15 results announcement.

Rating

BUY , TP: RM7.52

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 BUY with unchanged SOP-derived TP of RM7.52 (see Figure #2).

Source: Hong Leong Investment Bank Research - 7 May 2015