M1 disposal is viewed as a positive development. However, XL’s FY18 results came in below expectation 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. FY19 guidance was modest. Reiterate HOLD with TP of RM3.75.

Newsbreak. To dispose its 28.7% stake in M1 for a cash consideration of RM1.65bn with an estimated gain of RM126.5m. We view this positively as the deal allows Axiata to exit non-core business that is without management control. Also, the sale proceed will beef up its war chest to pursue strategic assets including its tower ambition.

XL results below. XL’s FY18 core net loss of IDR9bn was a disappointment when compared to consensus full year estimate of IDR7bn profit.

QoQ. Turnover inched up 3% thanks to service revenue’s 6% expansion whereby data gained 9% due to the increase in usage while further monetization was achieved via successful upselling. While headline remained in red, core bottom line was profitable after stripping one-off accelerated depreciation aided by improved EBITDA margin to 39% (3Q18: 37%).

YoY. Top line grew 1% supported by service revenue which also expanded at the same quantum. Excluding one-off items, core net profit plunged 86% attributable to higher interest expense which accelerated by 42%.

YTD. Turnover was flat as data (+13%) and other (+23%) gains were fully offset by the legacy’s contraction (-34%). After excluding one-offs (accelerated depreciation and tax impact), it registered a core net loss of IDR9bn compared to a profit of IDR740bn for the same period last year, no thanks to higher D&A and interest expense.

Expansion. Continued to invest to provide high quality internet services by adding 3G and 4G nodes by 0.9k and 1.7k QoQ, respectively in 4Q18. This brings total base stations to circa 119k. LTE is now available in 400 cities and areas across Indonesia.

Refarming. In order to achieve this, XL has switched off 2G in certain areas where usage has declined. This allows XL to refarm a majority of the spectrum for 4G. In turn, this has led to the accelerated depreciation of 2G assets which impacted 4Q18. However, this will lower rental and electricity expanses going forward.

Subscriber. Postpaid 4Q18 performance was solid by adding 70k subs (+7%) bringing the base to 1m while ARPU was resilient at IDR103k. Prepaid added 1m subs in 4Q18 to a total base of 54m on the back of stronger ARPU of IDR31k (+IDR1k QoQ). With the improved coverage, 82% of total base or 45m are data users generating 2,200PB of total traffic in FY18, up 76% YoY. As affordability increased, smartphone users also grew 8% YoY, reaching 44m users or 80% of the total base.

FY19 guidance. (1) Revenue growth to be in line or better than market; (2) EBITDA margin set at high 30’s; (3) Capex of circa IDR7.5tr.

Forecast. Maintain pending analyst briefing in conjunction with Axiata’s 4Q18 results announcement slated on 22 Feb. Reiterate HOLD on the back of unchanged SOP-derived TP of RM3.75 (see Figure #1). 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 - 18 Feb 2019