XL’s FY19 core net profit of IDR719bn (vs. FY18’s -IDR9bn) 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. FY20 revenue and EBITDA margin guidance imply resiliency. Reiterate HOLD on Axiata with TP of RM4.56.

Above expectations. XL’s (66.4% subsidiary of Axiata) 4Q19 core net profit of IDR214bn (flat QoQ, +269% YoY) brings FY19’s total to IDR719bn (FY18: -IDR9bn), accounting for 113% of consensus full year forecast. This outperformance was attributable to lower-than-expected D&A and interest expense. One-off items include forex loss (IDR13bn) and PPE disposal gain (IDR6bn).

QoQ. Turnover eased 1% as the flattish data revenue was overwhelmed by the 10% drop in non-data revenue. Market competition has intensified going into the end of 2019 with several players aggressively pushing products at cheaper prices. However, core bottom line was flat at IDR214bn on the back of improved EBITDA margin with savings in interconnect / direct, staff and infrastructure costs.

YoY. Top line grew 6% supported by service revenue which expanded by 11%. Data was the main revenue driver with 22% gain while legacy services were still in declines. Improved EBITDA margin of 41% (4Q18: 39%) on the back of discipline cost structure and lower D&A have led core net profit to surge 269%.

YTD. Turnover grew 9% supported by service revenue’s 15% gain. Data revenue expanded by 28% at the expense of legacy services which dropped 36% as more usage migrated from voice to data. Data now accounted for 89% of service revenue in FY19 and in a more resilient position versus peers to weather the effects of declining legacy revenues. Bottom line turned profitable (FY18: -IDR9bn) as EBITDA margin inched up 3-ppt to 40% (FY18: 37%) and lower net-of-one-off D&A (-12%).

Subscriber. Total base gain 1.2m (or +2%) QoQ to 56.7m subs despite increased priced-focused competition. Majority of the net adds came from prepaid while postpaid only added 11k subs. Prepaid ARPU was flat QoQ at IDR34k while postpaid’s eroded by 2% QoQ (or IDR2k) to IDR109k. With the improved coverage, 88% of total base or 50m are data users generating 3,320PB of total traffic in FY19, up 51% YoY. As affordability increased, smartphone users also grew 6% 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 116 and 968 QoQ, respectively in 4Q19. This brings total base stations to circa 130k. LTE is now available in 425 cities and areas across Indonesia with more than 40k eNodeB. XL Axiata also continues to invest in fiberizing its network to handle rising data traffic.

FY20 guidance. (1) Revenue growth to be in line with market); (2) EBITDA margin of low 40%; (3) Capex of circa IDR7.5tr.

Forecast. Maintain pending analyst briefing in conjunction with Axiata’s 4Q19 results announcement slated on 21 Feb. Axiata remains a HOLD on the back of unchanged SOP -derived TP of RM4.56 (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 - 11 Feb 2020