XL’s 1Q22 core net profit of IDR171bn (-36% QoQ, -26% YoY) missed expectation due to lower-than-expected EBITDA margin. Sequentially, total base lost 900k QoQ to 57m subs as postpaid’s addition was neutralized by prepaid’s attritions. Postpaid ARPU experienced erosion while prepaid’s was flat. Improved service quality with 4G coverage expansion while shutting down 3G footprints. Data growth remains solid supported by network quality and smartphone adoption. The amalgamation with Linknet is to realize the vision of becoming Indonesia’s No 1 converged telco. Reiterate HOLD on Axiata with unchanged TP of RM4.03.

Below expectation. XL’s (66.3% subsidiary of Axiata) 1Q22 core PAT of IDR171bn (-36% QoQ, -26% YoY) missed expectation, accounting for 12% of consensus full year estimate. The disappointment was mainly due to lower-than-expected EBITDA margin. 1Q22 one-off items include accelerated depreciation amounted to IDR30bn and forex loss of IDR1.6bn.

QoQ. Turnover was down 3% to IDR6.7tn due to seasonal weakness and heightened competition. Data revenue fell by the same quantum to IDR5.9tn as data accounted for 96% of 1Q22 service revenue. Margin dipped 2ppt to 47% which led to 6% decline in absolute EBITDA. In turn, core earnings fell by 36% to IDR171bn.

YoY. The 8% uplift in top line was on the back of data revenue’s 10% growth. Total operating expenses increased at a faster pace of 14% resulted in lower EBITDA margin by 3ppt. Thus, bottom line shrunk by 26% attributable to higher adjusted D&A (+5%).

Subscriber. Total base lost 900k QoQ to 57m subs as postpaid’s addition was neutralized by prepaid’s attritions. Prepaid and postpaid sub base ended 1Q22 with 55.6m and 1.4m, respectively. Prepaid ARPU was flat QoQ at IDR36k while postpaid’s was eroded by IDR8k QoQ to IDR98k. With the improved coverage and more affordable device bundle offerings, 93% of total base or 53m are smartphone users generating 1,857PB of total traffic in 1Q22, flat sequentially.

Expansion. Continued to invest to provide high quality internet services, especially ex Java, by expanding 4G coverage. It has added 26.8k 4G nodes YoY in 1Q22 while shutting down 3G footprints. This brings total base stations to circa 138k. LTE is now available in 460 cities and areas across Indonesia with circa 83k eNodeB.

Convergence. The amalgamation with Linknet is to realize the vision of becoming Indonesia’s No 1 converged telco. The acquisition will generate significant synergies through sharing of backbone and enterprise segment opportunities. The deal is expected to close in 3Q22. It does not see any major hurdles in obtaining regulatory approval.

FY22 guidance. Reiterate (1) Revenue growth to be in line with market; (2) EBITDA margin of low 50%; (3) Capex to be around IDR9tn.

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 1Q22 results announcement slated on 25 May. Reiterate HOLD with unchanged SOP-derived TP of RM4.03 (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 economic (in Sri Lanka) 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 - 11 May 2022