XL’s 1H19 core net profit of IDR291bn (+694% YoY) came in above expectations due to lower-than-expected D&A. Both QoQ and YoY quarterly improvements were mainly attributable to data-led top line gain as well as EBITDA margin expansion on the back of cost efficiency. Data growth remains solid supported by network quality and smartphone adoption. FY19 guidance was unchanged. Reiterate HOLD on Axiata with TP of RM4.94.

Above expectations. XL’s (66.4% subsidiary of Axiata) 2Q19 core net profit of IDR223bn (+225% QoQ, +443% YoY) brings 1H19’s total to IDR291bn (+694% YoY), accounting for 58% of consensus full year forecast. This outperformance was attributable to lower-than-expected D&A. One-off adjustments include forex loss and tax impact.

QoQ. Turnover inched up 5% thanks to service revenue’s 5% expansion. Data increased 8% due to the increase in usage driven by successful upselling coupled with data monetization improvement. This was more than sufficient to offset the 9% fall in legacy service revenue. Core bottom line gained 225% to reach IDR223bn thanks to enhanced EBITDA margin of 39% (1Q19: 38%).

YoY. Top line grew 13% supported by service revenue which expanded by 19%. Data was the main revenue driver with 32% gain while legacy services were still in declines. Improved EBITDA margin of 39% (2Q18: 36%) on the back of discipline cost structure has led to 4-fold jump in core net profit.

YTD. Turnover grew 11% supported by service revenue’s 15% gain. Data revenue expanded by 29% at the expense of legacy services which dropped 33% as more usage migrated from voice to data. Data now accounted for 87% of service revenue in 1H19 and in a more resilient position versus peers to weather the effects of declining legacy revenues. Core net profit jumped nearly 7-fold to IDR291bn as EBITDA margin inched up 3-ppt to 39% (1H18: 36%).

Subscriber. Total base added 1.5m (or 3%) QoQ to reach 56.6m subs. Majority was contributed by prepaid which acquired 1.5m new subs QoQ to a sum of 55.5m subs while postpaid growth was rather flat with 1m subs. Prepaid ARPU expanded strongly by 6% QoQ (or IDR2k) to IDR33k while postpaid’s contracted marginally by 1% QoQ (or IDR1k) to IDR109k. With the improved coverage, 88% of total base or 50m are data users generating 1,531PB of total traffic in 1H19, up 64% YoY. As affordability increased, smartphone users also grew 24% YoY, reaching 49m users or 86% of the total base.

Expansion. Continued to invest to provide high quality internet services, especially ex-Java, by adding 3G and 4G nodes by 1.1k and 4.2k QoQ, respectively in 2Q19. This brings total base stations to circa 127k. LTE is now available in 408 cities and areas across Indonesia with more than 37k eNodeB. XL Axiata also continues to invest in fiberization of its network to handle rising data traffic.

FY19 guidance. Despite the commendable 1H19 results, management keeps the initial guidance unchanged: (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 2Q19 results announcement slated on 28 Aug.

Axiata remains a HOLD on the back of unchanged SOP-derived TP of RM4.94 (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 - 2 Aug 2019