Results

• On the back of IDR16.1tr turnover, 9M16 core net loss of IDR250bn was a disappointment, incomparable to street full year estimate of IDR232bn profit.

Deviations

• Weaker-than-expected top line.

Dividends

• None.

Highlights

• YoY: service revenue saw second consecutive moderation of 8% as the decline in voice and SMS outpaced data’s growth. EBITDA also fell by 10% due to higher tower leasing and sales and marketing costs leading to the quarterly loss.

• QoQ: although gross revenue was flat, there was an uptick in service revenue by 2% thanks to stronger data growth. However, for the same reason above, EBITDA fell by 4%.

• YTD: while service revenue was weaker by 3%, EBITDA margin gained 3-ppt attributable to lower interconnect costs (in line with the down trending voice and SMS traffics) and lower infrastructure expenses.

• Postpaid performance was solid by adding 21k subs bringing the base to 511k at the same time strengthened ARPU to IDR116k, up from IDR108k.

• Mixed results for prepaid where 1m net adds (total 44.5m) was negated by the softened ARPU of IDR35k, down IDR1k qoq, mainly due to better traction in Axis relative to XL brand.

• Started to roll-out U900 (UMTS/3G over 900MHz) to provide better 3G experience and in-building coverage especially outside of Java. These sites are readily upgradable to 4G.

• Continue to invest to provide high quality internet services by adding 3G and 4G nodes by 10.5k and 2.0k, respectively in 3Q16. This brings total base stations to circa 78.7k.

• With the improved coverage, 65% of total base or 29.3m are data users generating 335PB of total traffic in 9M16, up 150% yoy. As affordability increased, smartphone users also grew 16% qoq, reaching 27m users or 60% of the total base.

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 3Q16 results announcement slated by end of Nov.

Rating

HOLD ↔, TP: RM5.64 ↔

• Regional exposures with focus on emerging countries with great growth potentials. However, regulatory and execution risks are major concern. Asset monetization through tower listing is a long term catalyst.

Valuation

• Maintain HOLD with unchanged SOP-derived TP of RM5.64 (see Figure #2)

Source: Hong Leong Investment Bank Research - 31 Oct 2016