Period

3Q15/9M15 for XL Axiata (XL), a 66.43% owned subsidiary of Axiata. Actual vs. Ex expectatio ns

XL’s 9M15 normalised NP of Rp74b came in below our but above the street’s estimate. Note that, we had earlier expected the group to report Rp282b net profit vs. the street’s estimates of Rp43b for FY15.

On our end, the key negative culprit was mainly due to the higher-than-expected infrastructure expense (on the back of higher frequency costs and rental expenses (mainly driven by the network expansion and sale of towers to STP which was completed in December 2014)) and forex impact.

Dividends

No dividend was announced during the quarter.

Key Results Highlights

YoY, 9M15 revenue was lower by 4% to Rp17.0T, as the higher Voice (+2%) and Data and VAS segment (+12%) incomes were offset by the lower SMS (-16%), and Cellular Interconnection & International Roaming Service segment (-21%). The shift of focus to the higher-value customers has led its blended ARPU to rise 28% to Rp32k from Rp25k a year ago. EBITDA, however, declined 4% in tandem with the weaker revenue while margin held steady at 35.8% (vs. 35.9% in 9M14). The decline in absolute EBITDA was mainly due to the impact of the consolidation of Axis as well as higher tower leasing costs post tower sale in December 2014. The group’s LBT has widened to Rp1.3T (+29%) following the higher forex loss of Rp3.0T (+186%) as a result of the weakening of IDR. Stripping off the unrealised forex loss of Rp 2.9T and Rp734b tax impact, the group’s 9M15 bottomline stood at Rp74b on normalised basis.

QoQ, XL’s revenue improved by 4% on the back of higher Voice (11%), Data & VAS (1%) and SMS segments (+6%). EBITDA, meanwhile, also advanced, by 10% with margin improving to 37.5% (vs. 35.5% in 2Q15) as a result of the higher cost efficiency and better customer mix.

Outlook

With the transformation agenda, the group remains confidence in achieving its EBITDA margin guidance (mid-to-high 30s). Nevertheless, its flattish revenue growth target appears challenging, judging from the uninspiring topline growth YTD. Capex, meanwhile, is likely to come in below the guided range of around Rp6.5T) as a result of better economy of scale.

Change to Forecasts

We trimmed our XL’s FY15E NP by 33% to Rp189b (after raising our infrastructure expense's assumption) but keeping the FY16E numbers unchanged at Rp.613b. Correspondingly, we have lowered our Axiata’s FY15 NP forecast by 1.2% but maintained our FY16 estimate.

Rating

Maintain MARKET PERFORM on Axiata

Valuation

Maintained Axiata’s TP at RM6.05 based on a targeted FY16E EV/forward EBITDA of 8.6x (representing a 4- year mean).

Risks to Our Call

Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 29 Oct 2015