Period

1Q16 for XL Axiata (XL), a 66.4% owned subsidiary of Axiata. Actual vs. Ex expectatio ns

XL’s 1Q16 normalised NL of Rp19b (+375% YoY) came in below our and the street’s estimates, where the street’s estimates as well as ours were targeting net profit of Rp859b and Rp812b for the full-year, respectively. On the reported basis, its net profit improved significantly to Rp169b (vs. –Rp758b in 1Q15) as a result of better cost efficiency and favourable forex. Having said that, we understand that 1Q is typically the weakest quarter due to seasonal factor.

The lower-than-expected normalised bottom-line was mainly due to the unrealised forex gain of Rp463b (where a major portion was from the interest of loans that were converted from USD to IDR).

Dividends

No dividend was announced during the quarter.

Key Results Highlights

YoY, 1Q16 revenue inched higher by 2% to Rp5.6T, as the higher Voice (+7%) and Data and VAS (+17%) segment incomes were offset by lower SMS (-18%), and Cellular Interconnection & International Roaming Service segment (-25%). Other telecommunications services revenue (which consists of leased towers, leased line and national roaming) improved by 29% mainly driven by higher tower leasing revenue.

XL’s total customer base has increased by 0.4m to 42.4m with blended APRU improving to Rp39k (vs. Rp34k in 4Q15). Its smartphone users grew to 20.5m (19% YoY) with 48% penetration rate as opposed to 33% a year ago.

EBITDA, meanwhile, was enhanced 17% with margin improved by 480bps to 38.9%. The increase was mainly due to lower OPEX (-5% as a result of lower interconnection and other direct expenses) and a reshape of the customer base to focus on the more profitable subscribers as well as a better products mix.

QoQ, XL’s revenue dipped by 6%, due to weaker performance of all its segments. EBITDA, meanwhile, was lower by 1% with margin improving to 40.5% (vs. 38.8% in 4Q15) as a result of the higher cost efficiency and better customer mix.

Outlook

XL remains hopeful to achieve its FY16 guidance despite recording a net loss in 1Q16 as a result of the seasonal factor and higher unrealised forex gain that arose from interest on loans.

XL maintained its FY16 guidance, where the group expects to record revenue growth to be within or better than the industry average of c.10%. Its EBITDA growth rate is expected to expand higher than its topline with margin in the high-30s due to better products and customers’ mix. Meanwhile, the group also guided for a targeted capex of c.Rp7T in FY16 with key spending focused on its 4G technology development.

Change to Forecasts

Unchanged, pending Axiata’s result due on 25th of May.

Rating

Maintain MARKET PERFORM on Axiata

Valuation

Maintain Axiata’s TP at RM6.15 based on a targeted FY16E EV/forward EBITDA of 7.9x (representing -1.0 SD below its 4-year mean).

Risks to Our Call

Downside: Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 22 Apr 2016