XL Axiata (XL)’s FY17 results came in above expectations. No dividend was announced during the quarter, as expected. Moving forward, XL is guiding 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.1% each. Maintain MARKET PERFORM but with higher SoP-driven TP of RM5.35.

XL (a 66.4% owned subsidiary of Axiata)’s FY17 normalised NP of Rp740b (vs. net loss of Rp209b a year ago) accounted for 142%/196% of our/street’s full-year estimates. On our end, the key deviations came from the higher-than-expected severance payment (due to the one-off increase in the headcount streamlining program as a result of the group’s organization transformation program). Note that, the FY17 normalized net profit was derived after removing Rp86b unrealized forex gain and Rp82b tax impact as well as adding Rp400b severance payment and Rb133b write-off on Elevenia Investment.

YoY, FY17 revenue was up by 7% to Rp22.9T, thanks to the higher service revenue (+10% to Rp20.3T driven mainly by taller data revenue) but partially offset by softer interconnect revenue (-15%, due to lower incoming off-net traffic). XL’s total customer base increased by 1.0m to 52.5m in 4Q17 with stable blended ARPU of Rp34k. Its smartphone users grew to 38.5m with 73% penetration rate as opposed to 65% a year ago. EBITDA, meanwhile, improved by 3% with margin declining 130bps to 36.3% as a result of higher interconnection, salary and employee benefits and other direct expenses. On a normalised basis, its EBITDA advanced by 7% to Rp8.7T (with margin flat at 38.1%) after stripping off the one-off cost relating to the organization transformation. QoQ, XL’s revenue stayed flat in 4Q17 while EBITDA declined 7% with thinner margin of 35.5% (or -270 bps), no thanks to higher OPEX. Data revenue accounted for the majority of service revenue at 75% vs. 58% 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 FY18 with an aim to perform in line with the industry average at mid-to-high single-digit growth as stricter government enforcement of prepaid SIM registration may hamper subscriber growth with around 50% of the group’s subscribers already registered. Its EBITDA margin, however, is expected to stay at the high thirties in view of the on-going cost initiatives with capex maintained at c.Rp.7T (with key spending to remain focused on its 4G technology development as well as network improvement, especially in the ex-Java areas) in FY18. Besides, XL also plans to explore the ‘triple play service’ to provide the next growth driver.

Turning positive on XL. While the management is taking a prudent view on its top-line performance in FY18, the better-than-expected cost controls initiatives (where XL’s EBITDA margin has improved sequentially since 1Q17) have led us turning more optimistic on its outlook. Post review, we have raised our XL’s FY18E PATAMI by 9% to Rp1.0T after tweaking our OPEX assumptions. Meanwhile, we also reduced our XL’s WACC assumption to 10.3% (from 11.1% previously) after revising the risk-free rate to reflect the current run-rate of 6.2% (vs. 6.8%previously) as well as lowering FY18-FY27 capex assumptions to c.Rp7T p.a. (vs. Rp8T-Rp8.5T p.a. previously).

AXIATA’s target price raised to RM5.35. We have raised our Axiata’s FY17E/18E earnings by 1.0%/0.7% post computing for XL’s numbers. On top of that, we also updated XL, 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 RM5.35 (from RM5.15 previously). Its MARKET PERFORM rating, however, remained unchanged as per our rating definition.

Source: Kenanga Research - 05 Feb 2018