Results

• On the back of IDR10.9tr turnover, 1H16 core net loss of IDR168bn was a disappointment, incomparable to street full year estimate of IDR2.4tr profit.

Deviations

• Weaker-than-expected top line.

Highlights

• YoY: 2Q16 service revenue fell 4.6% as the decline in voice and SMS outpaced data’s growth. This is the first yoy drop since 3R was introduced last year, thus raising doubts about the effectiveness of the 3-year transformation program. Nonetheless, EBITDA margin strengthened by 3ppt to 39%.

• QoQ: service revenue declined by 6.5% for the same reason above while EBITDA fell in tandem by 5.8%. EBITDA margin was held steady at 39%.

• Sub base for both postpaid / prepaid reached 490k / 43.5m, after recording net adds of 52k / 1.5m.

• However, postpaid and prepaid ARPUs softened to IDR108k (-IDR8k qoq) and IDR36k (-IDR2k qoq), respectively mainly due to better traction in Axis relative to XL brand.

• Balance sheet right sizing initiatives are completed after rights issue and tower disposal. This has reinstalled XL’s leverage position to pre-Axis level with 2.0x debt/EBITDA.

• Continue to invest to provide high quality internet services by adding 3G and 4G nodes by 1.5k and 2.0k, respectively in 2Q16. This brings total base stations to circa 66k.

• With the improved coverage, 54% of total base or 24m are data users generating 197PB of total traffic in 1H16, up 116% yoy.

• As affordability increased, smartphone users also grew 14% qoq, reaching 23.3m users or 53% of the total base.

• In view of the unexciting 1H16 results, XL revised revenue guidance from “in-line or better than market” to “challenging” while keeping others unchanged.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and in-country consolidations.

Risks

• Regulatory risks, price wars and high gearing level.

Forecasts

• Unchanged pending analyst briefing in conjunction with Axiata’s 2Q16 results announcement.

Rating

HOLD, TP: RM5.92

• Positives – mobile internet growth, margin improvements through collaborations/sharing and unlock value through tower listing.

• Negatives – Higher cost for spectra, OTT threat substituting voice and SMS, unable to monetize data.

Valuation

Maintain HOLD with unchanged SOP-derived TP of RM5.92

Source: Hong Leong Investment Bank Research - 24 Aug 2016