XL Axiata (XL)’s 1H17 results came in above our but within the street’s estimate. No dividend was announced during the quarter, as expected. Moving forward, XL is maintaining its top-line annual growth rate to come in similar to the industry average (at high-single digit) with EBITDA margin staying at the high thirties. We have tweaked our Axiata’s FY17E/18E earnings forecasts by 3%/1%. Maintained MARKET PERFORM but with higher SoP-driven TP of RM4.80.

XL’s (a 66.4% owned subsidiary of Axiata) 1H17 core NP of Rp114b (vs. net loss of Rp141b a year ago) accounted for 49%/37% of our/street’s full-year estimate. We deemed the result as above expectations given the group is set to deliver a stronger 2H, mainly driven by continued higher data revenue, effective dual-brand strategy and cost efficiency. Note that, the 1H17 normalized net profit was derived after removing Rp76b unrealized forex gain and adding Rp37b severance payment and Rp10b tax impact. On a reported basis, its net profit dipped to Rp143b (vs. Rp225b in 1H16) because of the Rp411b forex gain arising from USD denominated borrowings as well as a one-off tower gain (Rp457b) recorded in the prior year.

YoY, 1H17 revenue inched higher by 1% to Rp10.9T, thanks to the higher service revenue (4% to Rp9.6T driven mainly by taller data services' revenue) but partially offset by softer interconnect revenue (- 17%, due to lower incoming off-net traffic). Data revenue accounted for the majority of service revenue at 65% vs. 42% in the same period last year. XL’s total customer base has increased by 2.2m to 50.5m in 2Q17 with higher blended ARPU of Rp34k (vs. Rp33k in 1Q17). Its smartphone users grew to 33.8m with 67% penetration rate as opposed to 53% a year ago. EBITDA, meanwhile, was lowered by 8% with margin declining 330bps to 35.8% as a result of taller interconnection and other direct expenses. QoQ, XL’s revenue climbed 8% in 2Q17 while EBITDA improved 12% with higher margin of 36.5% (or +150 bps), thanks to higher turnover coupled with lower interconnection charges.

Outlook. XL continued to expect data monetization as well as the growth from ex-Jawa to be the key drivers for its revenue growth in FY17 with an aim to perform in-line with the industry average (of high single-digit growth). Its EBITDA margin, meanwhile, is expected to stay at high thirties in view of the potential cost savings arising from the upcoming towers renewal as well as managed services. Meanwhile, the group continued to guide its targeted capex of not more than Rp.7T in FY17 with key spending continued to focus on its 4G technology development as well as network improvement. All in, we are turning to slightly optimistic on the group’s outlook in FY17 in view of the encouraging sequential performance. Indeed, the strong sequential top-line growth in 2Q17 has proven that XL has reached the tipping point in data revenue growth outpacing the legacy revenue decline. Meanwhile, XL’s dual-brand strategy (where XL brand has emerged as the brand of choice for edgy professionals amongst white collar workers while AXIS is resonating well in the youth segment) also appeared to be gaining traction and gained 2.2m subscribers (the highest net adds since 2Q14) to its total customer base in 2Q17. Post review, we have raised our XL’s FY17-18E core NPs by 33%/17% to Rp310b/Rp620b on the back of higher revenue growth.

Axiata target price raised to RM4.80. We have raised our Axiata’s FY17E/18E earnings by 2.8%/1.2% post computing for XL’s numbers. On top of that, we also updated Idea and M1’s valuations (based on their latest closing share price) under our SoP valuation, which prompted us to raise the SoP-driven target price to RM4.80 (from RM4.70 previously). Its MARKET PERFORM rating, however, remained unchanged.

Source: Kenanga Research - 1 Aug 2017