• XL Axiata (XL)’s 3Q20 core PAT grew by 167% qoq to IDR331bn on lower tower leasing costs. Cumulatively, XL’s 9M20 core PAT of IDR513bn (+2% yoy) was above market and our expectations.
• However, the competition in Indonesia’s telco market has intensified in the recent month following new product launches from Telkomsel. This may dampen XL’s 2021 earnings trajectory.
• Operationally, we expect the businesses in Axiata’s other key markets to improve in 3Q20 (vs 2Q20). However, the 2H20-1H21 earnings risks remain elevated due to the weakened regional economies and policy uncertainties. Maintain HOLD on Axiata with an unchanged price target of RM3.15.

Lower Infrastructure Costs Drive XL’s 3Q20 Earnings

Axiata’s 66.3%-owned subsidiary, XL Axiata (XL) reported a decent set of results. In spite of a slight dip in service revenue (-0.4% qoq to IDR6,131bn), XL’s 3Q20 core PAT grew by 167% qoq to IDR331bn on the back of lower infrastructure costs (-15% qoq to IDR993bn) and lower depreciation expenses. Management guided that the group has renewed the leases of some of its towers at lower rates of IDR10.5-13.5m per month, a sharp reduction from the prior rates of IDR18-22m per month.

Cumulatively, 9M20 Core PAT of IDR513bn Beat Expectations

XL’s 9M20 service revenue grew by 8% yoy to IDR18,269bn on the back of a higher number of subscribers (+2.4% yoy to 56.88m) and an increase in blended ARPU (+5.9% yoy to IDR36,000 per month). However, XL’s 9M20 core PAT only grew by a mere 1.6% yoy (to IDR513bn), partly attributable to the negative financial impact from the adoption of IFRS 9, 15 and 16. Adjusted for the accounting changes, its 9M20 core net profit would have grown by 49% yoy. Overall, the results were above market and our expectations due to lower-than-expected costs.

Competition in Indonesia Has Heated Up

XL highlighted that intense competition in the market is affecting the industry’s growth. In particular, the country’s largest telco, Telkomsel, has turned aggressive in recent months with launches of attractively priced new products and services (eg. unlimited data plans). Management noted that it is uncommon for the incumbent market leader to be the most aggressive in cutting prices. XL also shared that the weakened domestic economies and high unemployment may take a toll on consumer spending and affect its business

Source: Affin Hwang Research - 9 Nov 2020