XL Axiata (XL)’s 9M17 results came in above expectations. No dividend was announced during the quarter, as expected. Moving forward, XL is maintaining its top-line annual growth rate to mirror the industry average with EBITDA margin staying at the high thirties. We have raised our Axiata’s FY17E/18E earnings forecasts by c.3% each. Maintain UNDERPERFORM but with higher SoP-driven TP of RM4.95.

XL’s (a 66.4% owned subsidiary of Axiata) 9M17 normalised NP of Rp338b (vs. net loss of Rp85b a year ago) accounted for 109% of our/street’s full-year estimates. On our end, the key deviations came from the lower-than-expected direct and marketing costs in 3Q17 as well as the interest expense. Note that, the 9M17 normalized net profit was derived after removing Rp44b unrealized forex gain and Rp33b tax impact as well as adding Rp45b severance payment and Rb133b write-off of Elevenia Investment. On a reported basis, its net profit advanced Rp238b (vs. Rp160b in 9M16) mainly fuelled by the lower finance cost and forex loss.

YoY, 9M17 revenue climbed by 5% to Rp16.9T, thanks to the higher service revenue (+8% to Rp14.9T driven mainly by taller data revenue) but partially offset by softer interconnect revenue (-17%, due to lower incoming off-net traffic). XL’s total customer base has increased by 2.0m to 52.5m in 3Q17 with stable blended ARPU of Rp34k. Its smartphone users grew to 36.8m with 70% penetration rate as opposed to 65% a year ago. EBITDA, meanwhile, was lowered by 1% with margin declining 200bps to 36.6% as a result of higher interconnection and other direct expenses. QoQ, XL’s revenue advanced by 5% in 3Q17 while EBITDA improved 10% with higher margin of 38.2% (or +170 bps), thanks to higher turnover coupled with cost efficiencies. Data revenue accounted for the majority of service revenue at 71% vs. 51% in the same period last year.

Outlook. XL continued to expect data monetization as well as the growth from ex-Java 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 on-going cost initiatives. Meanwhile, the group continued to guide a targeted capex of around Rp.7T in FY17 with key spending to remain focused on its 4G technology development as well as network improvement, especially in the ex-Java areas.

Turning positively on XL. All in, we are turning more optimistic on the group’s outlook in view of the encouraging sequential performance. Indeed, the strong sequential top-line growth in 3Q17 had 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 remains the brand of choice for professionals amongst both white and blue-collar workers while AXIS is resonating well in the youth segment) continues to gain traction with both brands offering innovative and differentiated data-led product offers catering to the respective segments. Post review, we have raised our XL’s FY17-18E core NPs by 68%/55% to Rp520b/Rp959b on the back of higher turnover and lower direct, marketing, as well as interest costs assumption. Risks to our call include: (i) heightened competition, and (ii) higher-than-expected churn from the current Prepaid SIM registration (starting from 31 Oct 2017 to 28 February 2018).

Target price raised to RM4.95. We have raised our Axiata’s FY17E/18E earnings by 3.1%/2.5% 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 RM4.95 (from RM4.80 previously). Its UNDERPERFORM rating, however, remained unchanged as per our rating definition.

Source: Kenanga Research - 02 Nov 2017