XL’s 1Q18 core net profit of IDR11bn (-97% QoQ; -47% YoY) is in line. Both postpaid and prepaid net adds were achieved at the expense of lower ARPU. SIM registration impact will be extended into 2Q18 but positive on the long term. Data growth remains solid supported by network quality and smartphone adoption. Guidance remains status quo. Reiterate HOLD with TP of RM5.01.

Within expectations: XL’s 1Q18 IDR5.5tr turnover was translated in to a core net profit of IDR11bn. This is considered in line as we expect 2H18 to be stronger.

QoQ: Revenue declined 8% as service revenue plunged 10% due to seasonal weakness and impact from regulatory reform of prepaid SIM registration. Despite the gain in EBITDA margin, core net profit nosedived 97% due to (1) lower sales; (2) higher D&A; and (3) lower tax benefit.

YoY: Top line grew 4% while service revenue expanded at a faster pace of 5% thanks to data uplift. Excluding one-off items, core net profit fell 47% impacted by higher D&A and lower tax benefit.

Postpaid: 1Q18 performance was a mixed bag where it added 101k subs QoQ bringing the base to 804k at the expense of ARPU, which contracted IDR8k to IDR106k.

Prepaid: 0.9m subs were added QoQ in 1Q18 to reach a total base of 53.7m. Again, these net adds was achieved at a lower ARPU of IDR29k, down IDR4k QoQ. SIM registration exercise has caused sales and marketing expense to balloon due to (1) higher A&P to entice subscribers; and (2) higher dealer commissions, in order to ensure the registration process is completed. While SIM registration impact is expected to spill over into 2Q18, XL remains positive and expects a healthier industry growth going forward as this will reduce rotational churn (20%-30% of total market) and SIM-related costs.

Expansion: Continued to invest to provide high quality internet services by adding 3G and 4G nodes by 2k and 3k QoQ, respectively in 1Q18. This brings total base stations to circa 106k. With the improved coverage, 76% of total base or 41m are data users generating 428PB of total traffic in 1Q18, up 81% YoY. As affordability increased, smartphone users also grew 9% YoY, reaching 40m users or 74% of the total base.

FY18 guidance unchanged: (1) revenue growth to be in-line with market; (2) EBITDA margin set at high 30’s; (3) CAPEX of circa IDR7.0tr.

Forecast: Maintain.

Reiterate HOLD on the back of unchanged SOP-derived TP of RM5.01. We like its regional exposures with focus on emerging countries which may deliver great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a catalyst.

Source: Hong Leong Investment Bank Research - 15 May 2018