Period

1Q15 for XL Axiata (XL) Actual vs. Ex expectations

XL’s 1Q15 normalised NL of Rp79b came in below expectations, where the street’s estimates as well as ours were targeting net profit of Rp859b and Rp702b for the full-year, respectively.

The lower normalised bottom-line was mainly due to: (i) change in subscriber acquisition strategy (from volume to value. Please refer to overleaf for more details), (ii) higher forex loss, and (iii) lower turnover as a result of the completion of the sale and leaseback of 3.5k towers.

XL expects its revenue to be under pressure in the 1H15 following the change in subscriber acquisition strategy and revamping of the product portfolio (with the specific aim of improving data profitability).

Dividends

No dividend was announced during the quarter.

Key Results Highlights

YoY, 1Q15 revenue was flat at Rp5.5T, as the growth in the Cellular Telecommunication service (+3%) was offset by the lower other telco services’ revenue (i.e. leased towers, leased lines and national roaming, - 44%). The former, which contributed c.95% to the total revenue, improved by 3%, thanks to higher Data & VAS (+31%) revenue, but largely offset by the lower contribution from both SMS (-8%) and Interconnection and International Roaming Service (- 18%) segments. Its EBITDA, meanwhile, tumbled by 15% to Rp1.9b with margin declining to 34.1% (from 39.8% a year ago) due to the higher OPEX (+9%) as a result of the impact of the consolidation of Axis and higher leasing cost (following the completion of tower sale and lease back in December 2014). The lower EBITDA coupled with higher D&A expenses and forex loss led XL to report a net loss of Rp758b in 1Q15.

QoQ, XL’s revenue was lower by 7% due to weaker performance in all its segments. EBITDA, meanwhile, also declined by 18% with margin dipping to 34.1% (vs. 38.8% in 4Q14) as a result of the higher infrastructure cost coupled with lower revenue.

Outlook

XL has removed its FY15 revenue guidance for now but expects to unveil the new target in August following the recent change in business strategy. Its EBITDA margin target, meanwhile, remains at mid-tohigh 30s in FY15 with capex spend likely to come in at c.Rp6b (vs. Rp7b guidance previously).

Change to Forecasts

Unchanged, pending Axiata’s results due on 20th May.

Rating

Maintain MARKET PERFORM

Valuation

Maintained TP at RM6.82 based on a targeted FY15E EV/forward EBITDA of 9.7x (+1.0x SD above its 4- year mean).

Risks to Our Call

Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 7 May 2015