XL’s 1H18 core net loss of IDR64bn (-150% YoY) came in below consensus expectations. This weakness was due to higher D&A and lower tax benefit. Postpaid base expanded with ARPU erosion while prepaid ARPU gain caused attrition. Prepaid SIM registration is over and expect positive impact on the long term. Data growth remains solid supported by network quality and smartphone adoption. Lifted revenue growth guidance but still remains unexciting. Reiterate HOLD with TP of RM4.88.

Below expectations: XL’s 1H18 IDR11.1tr turnover translated in to a core net loss of IDR64bn. This was a disappointment when compared to consensus full year estimate of IDR579bn profit.

QoQ: Revenue inched up 1% as other revenue’s expansion was more than sufficient to offset service revenue’s contraction due to impact from regulatory reform of prepaid SIM registration. Despite the stable EBITDA margin of 36%, core net profit turned red due to (1) higher finance cost and FOREX loss; and (2) the absence of tax benefit.

YoY: Top line fell 2% as service revenue declined 5% due prepaid SIM registration. Excluding one-off items, core net profit plunged 200% to a loss of IDR75bn attributable to higher D&A and lower tax benefit.

YTD: Turnover gained 1% thanks to higher contribution from non-service revenue. However, it registered a core net loss of IDR64bn for the same reason mentioned above.

Postpaid: 2Q18 performance was a mixed bag where it added 87k subs QoQ bringing the base to 891k at the expense of ARPU, which contracted IDR3k to IDR103k.

Prepaid: 1.7m subs churned in 2Q18 to a total base of 52m but ARPU expanded by IDR1k QoQ to IDR30k. SIM registration exercise has caused sales and marketing expense to balloon due to socialize, educate and incentivize customers to register their numbers. 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 1.5k and 4.5k QoQ, respectively in 2Q18. This brings total base stations to circa 112k. With the improved coverage, 79% of total base or 42m are data users generating 958PB of total traffic in 1H18, up 76% YoY. As affordability increased, smartphone users also grew 21% YoY, reaching 41m users or 77% of the total base.

FY18 guidance: (1) Revenue growth was raised from “in-line with market” to “above market” but expect total market to contract at a pace of low single digit; (2) EBITDA margin set at high 30’s; (3) CAPEX of circa IDR7.0tr.

Forecast: Maintain pending analyst briefing in conjunction with Axiata’s 2Q18 results announcement slated on 23 Aug. Reiterate HOLD on the back of unchanged SOP-derived TP of RM4.88. We like Axiata’s 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 - 1 Aug 2018