XL’s 1H21 core net profit of IDR564bn (+212% YoY) exceeded expectation thanks to lower-than-expected D&A, net finance cost and effective corporate tax rate. Sequential subscriber additions along with improved ARPU development thanks to strong Lebaran period and healthier market rivalry. Improved service quality with 4G coverage expansion (+16k eNodeB YoY) while rationalizing 3G footprints. Data growth remains solid supported by network quality and smartphone adoption. Reiterate HOLD on Axiata with unchanged TP of RM3.51.

Above expectation. XL’s (66.3% subsidiary of Axiata) 2Q21 core PAT of IDR333bn (+45% QoQ, +166% YoY) brought 1H21’s total to IDR564bn (+212% YoY), which beat expectation, accounting for 72% of consensus’ full year estimate. The positive surprise was due to lower-than-expected D&A, net finance expense and effective corporate tax rate. 1H21 one-off items include picocell gain (IDR155bn), tower disposal loss (IDR4bn) and forex gain (IDR2bn).

QoQ. Turnover was up 8% to IDR6.7tn mainly due to the increase in data revenue which gained 9% to IDR5.9tn. Data accounted for 94% of 2Q21 service revenue. Margin was sustained at 50% which led to similar 8% expansion in absolute EBITDA. In turn, core earnings strengthened 45% to IDR333bn on the back of rather flat D&A.

YoY. The 2% uplift in top line was on the back of data revenue’s 4% growth. Total operating expenses also increased at the same quantum of 2% resulted in stagnant EBITDA margin at 50%. However, bottom line jumped by 166% aided by lower D&A, finance cost and effective corporate tax rate.

YTD. The 1% slack in revenue was compensated by improved cost structure which yielded a flattish EBITDA, Yet, core net profit expanded by 212% to IDR564bn attributable to lower D&A, finance cost and effective corporate tax rate.

Subscriber. Spurred by strong Lebaran period and healthier market rivalry, total base added 750k (or +1.3%) QoQ to 56.8m subs as both prepaid and postpaid saw positive developments. Prepaid and postpaid sub base ended 2Q21 with 55.5m and 1.2m, respectively. Prepaid ARPUs increased by IDR3k QoQ to IDR36k while postpaid’s was stable at IDR108k. With the improved coverage and more affordable device bundle offerings, 91% of total base or 51.7m (+1.2m QoQ) are smartphone users generating 1,572PB of total traffic in 2Q21, up 13% QoQ.

Expansion. Continued to invest to provide high quality internet services, especially ex-Java, by expanding 4G coverage. It has added 15.9k 4G nodes YoY in 1H21 while rationalizing 3G footprints. This brings total base stations to circa 157k (+12% YoY). LTE is now available in 458 cities and areas across Indonesia with circa 66k eNodeB.

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

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 2Q21 results announcement slated on 27 Aug.

Axiata remains a HOLD on the back of unchanged SOP -derived TP of RM3.51 (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 - 6 Aug 2021