XL’s 1H22 core net profit of IDR648bn (+15% YoY) matched expectation thanks to price hike and strong Lebaran effect. Sequentially, total base added 230k QoQ to 57.2m subs as both postpaid and prepaid sub bases expanded. Postpaid ARPU experienced erosion while prepaid’s saw positive development. Improved service quality with 4G coverage expansion while shutting down 3G footprints. Data growth remains solid supported by network quality and smartphone adoption. Reiterate HOLD on Axiata with unchanged TP of RM2.81.

Within expectation. XL’s (66.3% subsidiary of Axiata) 2Q22 core PAT of IDR477bn (+179% QoQ, +43% YoY) lifted 1H22’s to IDR648bn (+15% YoY) which matched expectation, accounting for 52% of consensus full year estimate. 1H22 one-off items include accelerated depreciation amounted to IDR59bn, forex loss of IDR5bn and tower gain of IDR31bn.

QoQ. Turnover was up 9% to IDR7.3tn thanks to price hike and strong Lebaran effect. Data and digital services revenue gained 7% to IDR6.6tn and accounted for 90% of 2Q22 total revenue. Margin grew 1ppt to 48% which led to 12% increase in absolute EBITDA. In turn, core earnings jumped by 179% to IDR477bn.

YoY. The 9% uplift in top line was on the back of data revenue’s 8% growth. EBITDA expanded by 6% to IDR3.6tn although EBITDA margin was lower by 2ppt as total operating expenses increased at a faster pace of 12%. After stripping off one-off items, bottom line registered a 43% gain.

YTD. Similarly, turnover advanced 9% to IDR14.1tn supported by data revenue which also increased by 9%. In turn, core net profit grew 15% to IDR648bn.

Subscriber. Total base added 230k QoQ to 57.2m subs as both postpaid and prepaid sub bases gained and ended 2Q22 with 1.4m and 55.8m, respectively. Price hike boosted prepaid ARPU by IDR3k QoQ to IDR38k while postpaid’s was eroded by IDR1k QoQ to IDR97k. With the improved coverage and more affordable device bundle offerings, 91% of total base or 52.1m are 4G users generating 1,983PB of total traffic in 2Q22, +7% sequentially and +26% YoY.

Expansion. Continued to invest to provide high quality internet services, especially ex Java, by expanding 4G coverage. It has added 22.8k 4G nodes YoY in 1H22 while shutting down 3G footprints. This brings total base stations to circa 144k. LTE is now available in 460 cities and areas across Indonesia with circa 88k eNodeB.

Convergence. Closed LinkNet transaction with Axiata and in the progress of unlocking potential synergy. Strong convergence penetration as FTTH base increased from 19% to 28% in one quarter.

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

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 2Q22 results announcement slated on 26 Aug.

Reiterate HOLD with unchanged SOP-derived TP of RM2.81 (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 - 25 Aug 2022