XL’s 9M18 results came in below expectation as core net loss of IDR91bn (- 127% YoY) was wider-than-expected. This weakness was due to higher D&A and interest expense. Both postpaid and prepaid bases expanded on the back of resilient ARPU. Data growth remains solid supported by network quality and smartphone adoption. Guidance was maintained for FY18. Reiterate HOLD with TP of RM4.68.

Below expectations. XL’s 9M18 IDR16.9tr turnover translated in to a core net loss of IDR91bn. This was a disappointment when compared to consensus full year estimate of IDR468bn profit.

QoQ. Turnover inched up 6% thanks to service revenue’s 5% expansion attributable to more effective data monetization on the back of more rational competitive environment post prepaid SIM registration exercise. Core net profit remained in red despite the 64% improvement aided by higher EBITDA margin of 37% (2Q18: 36%).

YoY. Top line fell 2% as service revenue declined 5% due to prepaid SIM registration resulting in lower blended ARPU. Excluding one-off items, core net profit plunged 112% to a loss of IDR27bn attributable to higher D&A and interest expense.

YTD. Turnover was flat thanks to higher contribution from other revenues, more than offset service revenue’s 2% contraction. It registered a core net loss of IDR91bn for the same reason mentioned above, compared to a profit of IDR342bn for the same period last year.

Expansion. Capex allocation between Java and ex-Java was 50:50. Continued to invest to provide high quality internet services by adding 3G and 4G nodes by 1.1k and 3.3k QoQ, respectively in 3Q18. This brings total base stations to circa 116k. It also continues to invest in transmission, backhaul, network modernization and upgrades to support the rising data traffic across its network and to deliver stability, expand network capacity and improve quality of its data services.

Subscriber. Postpaid 3Q18 performance was modest by adding 63k subs (+7%) bringing the base to 954k while ARPU was resilient at IDR103k. Prepaid added 0.9m subs in 3Q18 to a total base of 53m on the back of stable ARPU of IDR30k. With the improved coverage, 80% of total base or 43m are data users generating 1,569PB of total traffic in 9M18, up 78% YoY. As affordability increased, smartphone users also grew 14% YoY, reaching 42m users or 78% of the total base.

FY18 guidance. Unchanged with (1) revenue growth to be above market; (2) EBITDA margin set at high 30’s; (3) Capex of circa IDR7.0tr.

Forecast: Maintain pending analyst briefing in conjunction with Axiata’s 3Q18 results announcement slated later this month. Reiterate HOLD on the back of unchanged SOP-derived TP of RM4.68. 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 - 2 Nov 2018