Results

• On the back of IDR17.0tr turnover, 9M15 EBITDA of IDR6.1tr was within expectations, accounting for 73.3% of consensus’ FY estimate.

Deviations

• In line.

Highlights

• Transformation strategy continues to show further positive momentum in terms of financial performance and operating metrics. Additionally, XL has repaid or refinanced a total of USD580m unhedged external debt. The remaining external USD debt is fully hedged until maturity.

• 3Q15 sales expanded 2.4% qoq thanks to both voice (+11% qoq) and data (+5% qoq). For 9M15, data’s contribution to overall revenue edged up 3-ppt yoy to 31% as traffic surged 52.2% yoy to 131.6PB.

• Smartphone users grew 7% yoy, reaching 15.6m users or 38% of the total base. While smartphone is data’s main growth driver, it has also persistently eroded SMS revenue by 16% yoy as users migrate to OTT platforms.

• Elimination of unprofitable packages has caused a net churn of 4.6m subs in 3Q15. However, this is not a concern as those attritions are of low value. This is evident from the 19% qoq rise in blended ARPU from IDR32k in 2Q15 to IDR38k in 3Q15.

• EBITDA margin gained 2-ppt qoq to 37.5% mainly due to the reshape of customer base to focus on more profitable subs, improved margins of product portfolio as well as effective cost control.

• Continue to invest to provide high quality internet services by adding 3G and 4G nodes by 672 and 786, respectively in 2Q15. This brings total base stations to circa 56.3k.

• Guidance was maintained with flat revenue growth; mid to high 30’s EBITDA margin; and CAPEX of IDR6.5tr.

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 3Q15 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 - 29 Oct 2015