XL Axiata’s (XL) 1H16 results came in below expectations due to lower-than-expected service revenue in 2Q16. No dividend was announced during the quarter, as expected. Management maintains its EBITDA growth rate and margin for FY16 but foresees a challenging time for top line target following the uninspiring 1H16 performance. All in all, we maintained our Axiata’s FY16-17E earnings for now (but with downward bias). Maintain MARKET PERFORM with an unchanged TP of RM5.81.

XL’s (a 66.4% owned subsidiary of Axiata) 1H16 normalised NL of Rp168b (vs. net profit of Rp84b a year ago) came in below our and the street’s estimates, where the street’s estimates as well as ours were targeting net profit of Rp681b and Rp875b for the full-year, respectively. Note that the normalized net loss was derived after removing the unrealized forex gain, accelerated depreciation, loss from capital lease, severance payment and the tax impact. The negative variance on our end was mainly due to the lower-than-expected service revenue, no thanks to the diminishing pre-andpostpaid ARPU in 2Q16 following the higher take-up rate of its value plans (under Axis brand, which provides more data-centric services) as compared with the premium plans (XL brand). On reported basis, its net profit improved significantly to Rp225b (vs. –Rp851b in 1H15) as a result of the strengthening of the Rupiah against the USD and a one-off gain from the sale of towers to Protelindo in 2Q16.

YoY, 1H16 revenue dived by 2% to Rp10.9T, no thanks to the lower interconnect revenue (-26%, due to lower off-net traffic) coupled with a flattish service revenue performance as the strong growth in data services was offset by a decrease in revenue from Legacy Service – Voice and SMS. XL’s total customer base has increased by 1.6m to 44.0m with blended APRU reduced to Rp37k (vs. Rp39k in 1Q16 as a result of stronger take-up in its value plans). Its smartphone users grew to 23.3m (43% YoY) with 53% penetration rate as opposed to 36% a year ago. EBITDA, meanwhile, was enhanced 10% with margin improved by 430bps to 39.1%. The increase was mainly due to focus on the more profitable subscribers as well as product pricing optimization. Further, efforts on cost controls also contributed to the improvement in EBITDA margins.

QoQ, XL’s revenue dipped by 7%, due to weaker performance of the service revenue (-8.5% to Rp5.25T as a result of lower ARPU) but partially offset by higher cellular interconnection & international roaming service (14% to Rp551b). EBITDA, meanwhile, was lower by 6% with margin improving slightly to 39.3% (vs. 38.9% in 1Q16) as a result of the higher-cost efficiency.

4G LTE remains a key part of XL’s mobile Internet leadership strategy to meet consumer demand for high-speed internet. The group’s 4G footprint is now at 5,250 sites as at end 1H16 (vs. 3.3k in 1Q16) with presence in over 58 cities and areas.

Outlook. With the three-year transformation agenda moving into Year 2, the group remains hopeful to achieve better EBITDA growth rate (higher than its top line growth) in FY16 with margin in the high-30s due to better products and customers’ mix. XL’s revenue target (to be within or better than the industry average of c.10%), however, appear challenging following the uninspiring 1H16 performance. Capex, meanwhile, is expected to come in below Rp7.0T with key spending focused on its 4G technology development.

Valuation remain unchanged for now. All in all, we maintained our Axiata’s FY16-17E earnings for now (but with downward bias), pending the upcoming 2Q16 result releases due 25th August. Maintain MARKET PERFORM with an unchanged TP of RM5.81 based on targeted FY17E EV/forward EBITDA of 7.1x, representing -2.0x SD below its four-year mean.

Source: Kenanga Research - 24 Aug 2016