Results

• On the back of IDR11.1tr turnover, XL recorded a core net profit of IDR84.0bn, accounting for 40% of consensus’ FY estimate of IDR209.9bn. Considered as above expectation given the loss-making 1Q15 of IDR79.0bn and XL has guided for growth ahead.

Deviations

• Lower-than-expected finance cost.

Highlights

• Transformation strategy was fruitful and began to show early promising signs and results. This is evident from several positive leading indicators including materially improving subscriber mix (high value subs), rising reloads per sub, joiner ARPU significantly higher than churners’ and an increased share of modern distribution versus traditional.

• 2Q15 sales expanded 2.4% qoq, first qoq growth since 2Q14 thanks to both voice (+7% qoq) and data & VAS (+2% qoq).

• For 1H15, data’s contribution to overall revenue edged up 4- ppt yoy to 32% as traffic surged 65% yoy to 87.8PB.

• Smartphone users grew significantly by 23% yoy, reaching 16.3m users or 36% 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 gained 2-ppt qoq to 36% mainly due to reshape of the customer base to focus on the more profitable subs as well as to improve margins of product portfolio. This is also attributable to the reduced service access payments to RIM for BlackBerry services.

• Continue to invest to provide high quality internet services by adding 3G and 4G nodes by 815 and 52, respectively in 2Q15. This brings total base stations to circa 55k.

• Not comfortable of its debt profile which skewed towards USD and will explore ways to pare them down. Out of the USD1.5bn loan, circa USD500m owed to Axiata and the remaining is 60% hedged.

• With better visibility into the effectiveness of its turnaround plan, XL has guided for flat revenue growth with unchanged mid to high 30’s EBITDA margin while CAPEX has been reduced to IDR6.5tr from IDR7.0tr.

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 2Q15 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 - 17 Aug 2015