XL’s 1Q21 core net profit of IDR230bn (+39% QoQ, +311% YoY) matched expectation. Generally, the improvements were mainly driven by effective operating cost rationalization, lower D&A and interest expense . Sequential subscriber attritions along with subpar ARPU development were blamed on price competition. 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.

Within expectation. XL’s (66.3% subsidiary of Axiata) 1Q21 core net profit of IDR230bn (+39% QoQ, +311% YoY) matched expectation, accounting for 24% of consensus’ full year estimate. 1Q21 one-off items include picocell gain (IDR93bn), tower disposal loss (IDR4bn) and forex gain (IDR2bn).

QoQ. Turnover was down 2% at IDR6.3tr mainly due to the decline in data revenue which fell by 1% to IDR5.4tr. Data accounted for 94% of 1Q21 service revenue. EBITDA margin was sustained at 50% where savings in regulatory (-6%), supplies and overhead (-17%) were offset by higher expenses in infrastructure (+5%), sales and marketing (+17%). Core net profit strengthened 39% to IDR230bn mainly thanks to lower D&A (-21%) and finance cost (-18%).

YoY. Top line moderated 4% as both data and traditional service revenues fell by 1% and 33% to IDR5.4bn and IDR371bn, respectively. However, reported EBITDA only eased by a smaller quantum of 2% thanks to lower infrastructure (-11%), labour (- 23%), interconnect and other direct (-28%) expenses. Subsequently, bottom line jumped by 311% coupled with lower D&A (-7%) and interest cost (-12%).

Subscriber. Total base churned 1.9m (or -3%) QoQ to 56.0m subs as the prepaid attrition completely offset the 30k gain in postpaid subs. Prepaid and postpaid sub base ended 1Q21 with 54.8m and 1.2m, respectively. Prepaid ARPUs was stable at IDR33k while postpaid’s was eroded by IDR2k QoQ to IDR108k due to price competition. With the improved coverage and more affordable device bundle offerings, 90% of total base or 50m (-2m QoQ) are smartphone users generating 1,391PB of total traffic in 1Q21, up 40% YoY.

Expansion. Continued to invest to provide high quality internet services, especially ex-Java, by expanding 4G coverage. XL has added 13.5k 4G nodes YoY while rationalizing 3G and 2G footprints. This brings total base stations to circa 148k (+11% YoY). LTE is now available in 458 cities and areas across Indonesia with circa 57k eNodeB.

FY21 guidance. Reiterate (1) Revenue growth to be in line with market); (2) EBITDA margin of low 50%; (3) Capex of circa IDR7.0tr.

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 1Q21 results announcement slated on 25 May.

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 potentials. While we are positive on Celcom-Digi merger allowing Axiata to unlock values, regulatory (especially in Nepal) and execution risks are major concerns. Other potential corporate exercises that may unlock values include tower asset and digital businesses listings.

Source: Hong Leong Investment Bank Research - 28 Apr 2021