XL’s 9M20 core net profit of IDR513bn (+2% YoY) came in above expectation due to stronger-than-expected sales and EBITDA margin. Leaner cost structure was achieved with savings in infrastructure, sales and marketing, interconnect and other direct expenses. Despite ARPU erosion, sequential revenue was sustained by subscriber additions. Improved service quality with 4G coverage expansion while rationalizing 2G and 3G footprints. Data growth remains solid supported by network quality and smartphone adoption. Reiterate HOLD on Axiata with TP of RM3.36.

Above expectation. XL’s (66.4% subsidiary of Axiata) 3Q20 core net profit of IDR331bn (+167% QoQ, +55% YoY) summed 9M20’s to IDR513bn (+2% YoY) which was a beat, accounting for 80% of consensus’ full year estimate. This outperformance was attributable to stronger-than-expected sales and EBITDA margin. 9M20 one-off items include tower disposal gain (IDR1.6tr) and forex gain (IDR8bn).

QoQ. Turnover was flat at IDR6.6tr as the 0.4% increase in data revenue was fully offset by the decline in non-data and other revenues. Data accounted for 93% of 3Q20 service revenue. Reported EBITDA was higher by 3% to IDR3.4tr thanks to lower infrastructure cost by 15%. In turn, core net profit gained 167% which also partly aided by lower D&A (-6%).

YoY. Top line grew 2% supported by data revenue which expanded by 7%, more than sufficient to offset the declines in traditional services. Reported EBITDA surged by 31% and pre IFRS-adjusted EBITDA rose 16% thanks to lower infrastructure (-38%), marketing (-5%), interconnect and other direct (-30%) expenses. As such, bottom line improved by 55%.

YTD. For the same reasons mentioned above, revenue and core earnings gained 5% and 2%, respectively.

Subscriber. Total base added 1.2m (or +2%) QoQ to 56.9m subs at the expense of ARPU. The gain was solely contributed by prepaid which has elevated to a base of 55.7m while postpaid was stagnant at 1.1m. Both prepaid and postpaid ARPUs were eroded by IDR1k QoQ to IDR35k and IDR110k, respectively due to competition. With the improved coverage and more affordable device bundle offerings, 88% of total base or 50m are smartphone users generating 3,496PB of total traffic in 9M20, up 47% YoY.

Expansion. Continued to invest to provide high quality internet services, especially ex-Java, by expanding 4G coverage. XL has added 13.8k 4G nodes YoY while rationalizing 3G and 2G footprints. This brings total base stations to circa 143k (+10% YoY). LTE is now available in 458 cities and areas across Indonesia with circa 53k eNodeB.

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 3Q20 results announcement slated on 26 Nov.

Axiata remains a HOLD on the back of unchanged SOP-derived TP of RM3.36 (see Figure #1). We like its regional exposures with focus on emerging countries which may deliver great growth potential. However, regulatory (especially in Nepal) and execution risks are major concerns. With the mega merger called off, other potential corporate exercises that may unlock values include in-country consolidation, tower asset and digital businesses listings.

Source: Hong Leong Investment Bank Research - 6 Nov 2020