Period     2Q13/1H13 for XL Axiata (“XL”)

Actual vs. Expectations   XL’s 1H13 core NP of Rp749b (-51% YoY) came in within ours but below market expectation and accounted for 43.7% of ours and only 28.5% of the street’s full-year estimates. The culprits were mainly due to (i) price changes in the voice segment, (ii)higher interconnection cost; and (iii) higher infrastructure expenses to expand its 3G network coverage.

Dividends    No dividend was announced during the quarter. 

Key Result Highlights   YoY, XL’s 1H13 revenue rose marginally by 1% to Rp10.3T, driven by higher contributions across all its services, particularly the Data & VAS (+16%) and Roaming services (+45%) but partially offset by the lower SMS (-4%) and Voice (-10%) segments. With the growth in data, non-voice revenue now contributed 53% of XL’s total usage revenue of Rp9.6T. XL’s smartphone users have reached 9m or 16% of the 54.1m total base. We understand that most of the data users were committed to either the Pay Per Use or Volume-Based data plans.

QoQ, XL’s 2Q13 revenue improved by 5%, thanks to the positive momentum on operational improvements coupled with gradual price optimisation initiated in mid 1Q13. The core net profit advanced to Rp409b (+20%) as a result of the higher turnover coupled with improvements in margins and a lower taxation rate.

The total operating expenses, meanwhile, increased by 18% YoY to Rp6.1T in 1H13 due to higher interconnection and other direct expenses (+52% YoY) led by the introduction of a 4% SMS interconnection cost. Infrastructure expenses were also up by 11% YoY, in line with its 3G network coverage expansion plan.  

The group’s 1H13 EBITDA margin declined to 40.3% vs. 48.2% a year ago due mainly due to (i) the introduction of SMS interconnection charge, (ii) higher data segment contribution; and (iii) higher network costs.

Outlook    XL has lowered its FY13 revenue growth target to mid-single digit (from previous guidance of 8%-9%) in view of its lacklustre 1H13 result.  Meanwhile, the group maintained its EBITDA margin guidance at low 40% range in FY13 as a result of higher data contribution and the impact of the interconnection rate. 

Change to Forecasts   We have lowered our Axiata’s FY13E and FY14E net profits marginally by 1.1% and 0.7% respectively. 

Rating  Maintain at MARKET PERFORM 

Valuation     Our Axiata TP is maintained at RM6.72 based on an unchanged targeted FY14 EV/forward EBITDA multiple of 8.2x (+1.0 SD).

Risks    Regulation risks in its overseas ventures. 

Source: Kenanga