XL’s FY20 core net profit of IDR679bn (-6% YoY) came in below expectation due to higher-than-expected D&A and finance expense. This was despite the leaner cost structure was achieved with savings in infrastructure, sales and marketing, interconnect and other direct expenses. Sequential subscriber additions were marred by ARPU erosion. 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 RM3.76.

Below expectation. XL’s (66.4% subsidiary of Axiata) 4Q20 core net profit of IDR166bn (-50% QoQ, -22% YoY) summed FY20’s to IDR679bn (-6% YoY) which was a miss, accounting for 35% of consensus’ full year estimate. This disappointment was attributable to higher-than-expected D&A and finance expense. FY20 one-off items include tower disposal gain (IDR1.5tr), accelerated depreciation (IDR1.9tr), picocell gain (IDR70bn), data centre gain (IDR4bn) and forex gain (IDR6bn).

QoQ. Turnover was down 3% at IDR6.4tr mainly due to the decline in data revenue which fell by 4% to IDR5.4tr. Data accounted for 93% of 4Q20 service revenue. Reported EBITDA was lower by 7% to IDR3.2tr impacted by higher regulatory cost (+7%). In turn, core net profit plunged 50%.

YoY. Top line moderated 1% as data revenue which expanded by 2% was not sufficient to offset the declines in traditional services. Reported EBITDA surged by 21% thanks to lower infrastructure (-35%), marketing (-16%), interconnect and other direct (-28%) expenses. However, bottom line contracted by 22% due to higher D&A and interest cost.

YTD. For the same reasons mentioned above, revenue gained +3% but core earnings fell by 6%.

Subscriber. Total base added 1.0m (or +2%) QoQ to 57.9m subs at the expense of ARPU. Both prepaid and postpaid added 1m and 10k users to achieve a base on 56.7m and 1.2m, respectively. Prepaid ARPUs was eroded by IDR2k QoQ to IDR33k due to competition while postpaid’s was stable QoQ at IDR110k. With the improved coverage and more affordable device bundle offerings, 89% of total base or 52m (+2m QoQ) are smartphone users generating 4,869PB of total traffic in FY20, up 47% YoY.

Expansion. Continued to invest to provide high quality internet services, especially ex-Java, by expanding 4G coverage. XL has added 14k 4G nodes YoY while rationalizing 3G and 2G footprints. This brings total base stations to circa 145k (+11% YoY). LTE is now available in 458 cities and areas across Indonesia with circa 54k eNodeB.

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 4Q20 results announcement slated on 25 Feb. Axiata remains a HOLD on the back of unchanged SOP -derived TP of RM3.76 (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 - 16 Feb 2021