Period  3Q14/9M14 for XL Axiata (XL)

Actual vs. Expectations XL’s 9M14 normalised NL of Rp250b came in below expectations, where the street’s estimates as well as ours were targeting net profit of Rp355b and Rp329b for the full-year, respectively. The lower normalised bottom-line was mainly due to: (i) the full impact of Axis integration, (ii) higher finance cost from additional loan for Axis’ acquisition, and (iii) higher forex loss related to the weakening of the Rupiah.

Dividends  No dividend was announced during the quarter.

Key Results Highlights YoY, XL’s 9M14 revenue climbed 11% to Rp17.6T, mainly driven by higher Data & VAS (+43%), Voice (+4%) and SMS (+4%). Its EBITDA, however, was lowered by 1% to Rp6.3T with margin declining to

36% (from 40% previously) due to higher operating expenses (+19% to Rp11.2T) on the back of higher infrastructure expenses (+43%) and salaries & employee benefits (+25%) which arose mainly from the integration of Axis’ acquisition. Its finance cost, meanwhile, also increased by 55% to Rp1.0T as a result of additional loan related to the acquisition of Axis.

 QoQ, XL’s revenue flat out at Rp6.0T as the growth in data segment (+2%) was offsetted by the lower Voice revenue (-2%) while the SMS division recorded flattish growth. Its total OPEX, however, increased by 4% as a result of higher network cost and depreciation expenses arising from Axis acquisition. The higher OPEX coupled with the higher forex loss led the group to report a net loss of Rp419m in 3Q14.

 As at end 3Q14, XL hedged 63% of external USD loan (out of the total USD1.6T) while its total interest bearing debt stood at Rp30.4T (vs. Rp17.5T a year ago). Its net gearing currently stood at 2.0x with 3.2x in net debt/EBITDA level.

 XL’s total subscribers net adds declined to 58.2m (vs. 62.9m in 2Q14) as a result of higher churn recorded in its prepaid segment (-4.7m to 57.8m) due to its price optimisation/increase in its data plans during the quarter. Nevertheless, management believes the impact is only short-term in nature and expects to resume its growth path in the coming quarter.

Outlook  XL maintained its annual revenue growth target at low teens for FY14. Its EBITDA margin, meanwhile, is expected to drop to mid-30s due to stiff competition and Axis acquisition costs. Meanwhile, the group also maintained its capex guidance of Rp7T in FY14.

Change to Forecasts Unchanged, pending Axiata’s results due on 24^th November.

Rating Maintain MARKET PERFORM

Valuation  Maintained our Axiata TP at RM6.92 based on a targeted FY15 EV/forward EBITDA of 9.1x (+1.0x SD above its 4-year mean).

Risks to Our Call Regulation and currency risks in its overseas ventures.

Source: Kenanga