XL’s 9M19 core net profit of IDR505bn (vs 9M18’s -IDR67bn) came in above expectations due to lower-than-expected D&A and interest expense. A slight weakness sequentially as rivalry intensified but 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 revenue and EBITDA margin guidance were lifted. Reiterate HOLD on Axiata with TP of RM4.85.

Above expectations. XL’s (66.4% subsidiary of Axiata) 3Q19 core net profit of IDR214bn (-4% QoQ, 3Q18: -IDR18bn) brings 9M19’s total to IDR505bn (9M18: - IDR67bn), accounting for 91% of consensus full year forecast. This outperformance was attributable to lower-than-expected D&A and interest expense. One-off items include forex loss and tax impact.

QoQ. Turnover inched up 3% thanks to service revenue’s 4% expansion. Data increased 6% due to the increase in usage driven by successful upselling coupled with data monetization improvement. This was more than sufficient to offset the 11% fall in legacy service revenue. However, core bottom line fell 4% to IDR214bn on the back of higher D&A (+7%)

YoY. Top line grew 10% supported by service revenue which expanded by 18%. Data was the main revenue driver with 33% gain while legacy services were still in declines. Improved EBITDA margin of 40% (3Q18: 37%) on the back of discipline cost structure and lower D&A have led core net profit to return to the black.

YTD. Turnover grew 11% supported by service revenue’s 16% gain. Data revenue expanded by 30% at the expense of legacy services which dropped 35% as more usage migrated from voice to data. Data now accounted for 88% of service revenue in 9M19 and in a more resilient position versus peers to weather the effects of declining legacy revenues. Bottom line turned profitable (9M18: -IDR67bn) as EBITDA margin inched up 3-ppt to 39% (9M18: 36%) and lower D&A (-4%)

Subscriber. Total base lost 1.1m (or -2%) QoQ to 55.5m subs due to increased competition. Churn was solely attributable to prepaid while postpaid growth was rather flat with 1m subs. Prepaid ARPU expanded by 3% QoQ (or IDR1k) to IDR34k while postpaid’s gained 2% QoQ (or IDR2k) to IDR111k. With the improved coverage, 88% of total base or 49m are data users generating 2,386PB of total traffic in 9M19, up 56% YoY. As affordability increased, smartphone users also grew 8% YoY, reaching 48m 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 651 and 2k QoQ, respectively in 3Q19. This brings total base stations to circa 129k. LTE is now available in 410 cities and areas across Indonesia with more than 39k eNodeB. XL Axiata also continues to invest in fiberization of its network to handle rising data traffic.

Lifted FY19 guidance. (1) Revenue growth to be better than market (previously: in line or better than market); (2) EBITDA margin to be closer to 40% (previously at high 30’s); (3) Capex of circa IDR7.5tr.

Forecast. Maintain pending analyst briefing in conjunction with Axiata’s 3Q19 results announcement slated on 28 Nov. Axiata remains a HOLD on the back of unchanged SOP-derived TP of RM4.85 (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 - 7 Nov 2019