XL Axiata (XL)’s 1Q18 results came in below expectations, no thanks to the structural changes in the prepaid market in the form of SIM registration. 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 lowered our Axiata’s FY18E/19E earnings forecasts by 1%/0.3%. Maintain MARKET PERFORM but with lower SoP-driven TP of RM5.25.

XL (a 66.4% owned subsidiary of Axiata)’s 1Q18 normalised NP of Rp11b (-47% YoY) accounted for 1.0%/1.4% of our/street’s full-year estimates. On our end, the key negative deviations mainly came from lower-than-expected service revenue (as a result of heightened data pricing and prepaid SIM registration) and higher-than-expected sales & marketing expenses (where higher A&P and commissions were required to ensure customers completed the prepaid SIM registration). Note that the 1Q18 normalized net profit was derived after removing Rp5b unrealized forex gain and adding Rp1b tax impact.

YoY, 1Q18 revenue was up by 4% to Rp5.5T, thanks to the higher service revenue (+5% to Rp4.8T driven mainly by taller data revenue) but partially offset by softer interconnect revenue (-14%, due to lower incoming off-net traffic). XL’s total customer base increased by 1.0m to 54.5m in 1Q18 with lower blended ARPU of Rp30k (4Q17: Rp34k). Its smartphone users grew to 40.3m with 74% penetration rate as opposed to 65% a year ago. EBITDA, meanwhile, improved by 7% with margin increasing by 110bps to 36.1% as a result of higher revenue and cost efficiencies. PAT, however, dipped by 67% due to the 27% decline in tax benefits recorded in 1Q18. QoQ, XL’s service revenue weakened by 10% in 1Q18 while EBIT declined 18% due to higher D&A expenses (+10% YoY) as a result of the company’s network roll-out. Data revenue accounted for the majority of service revenue at 77% vs. 63% in the same period last year.

Continued focus on strategy execution. XL continues to build leadership as a data-centric company through focus on data-led products via its dual-brand strategy and combined with continued investment in network. The group continued to expect data monetization, technology innovations 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 low single-digit growth). 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 has also started to explore the new triple-play service (via venturing into the pay-TV, broadband internet and voice telephony) to provide the next growth driver.

AXIATA’s SoP-derived target price lowered to RM5.25. Post review, we have reduced our XL’s FY18E/19E PATAMI by 27%/1.6% (to Rp747b/Rp1.0T) after incorporating the tepid 1Q18 performance as well as tweaking our OPEX assumptions. With that, we lowered our Axiata’s FY18E/19E earnings by 1.1%/0.3% post computing for XL’s numbers. Besides, we also updated XL, Idea and M1’s valuations (based on their latest closing share prices) under our SoP valuation, which led us to lower our SoP-driven target price to RM5.25 (vs. RM5.35 previously). Maintained MARKET PERFORM rating.

Source: Kenanga Research - 15 May 2018