XL Axiata (XL)’s 1H18 results came in below expectations, weighed down by higher D&A expenses. No dividend was announced during the quarter, as expected. Moving forward, XL is guiding for top-line annual growth to perform higher than the industry average with EBITDA margin staying at the high thirties. We have lowered our Axiata’s FY18E/19E earnings forecasts by 3%/2%. Maintain OUPTERFORM but with lower SoP-driven TP of RM4.95.

XL (a 66.4%-owned subsidiary of Axiata)’s 1H18 normalised NL of Rp64b (-156% YoY) came in below estimates, where the street as well as ours were targeting net profit of Rp579b and Rp653b for the full-year, respectively. On our end, the key negative deviations mainly came from the higher-than-expected depreciation. Note that the 1H18 normalised net profit was derived after adding Rp23b unrealized forex losses and removing an Rp6b tax impact.

YoY, 1H18 revenue was up by 1% to Rp11.0T, thanks to the higher other telecom services (+23% to Rp574b, which comprises mainly leased tower, leased lines and others) while service revenue remained flat at Rp9.6T. XL’s total customer base eased by 1.6m to 52.9m in 2Q18 (as a result of the prepaid SIM registration) with higher blended ARPU of Rp31k (1Q18: Rp30k). Its smartphone users grew to 40.7m with 77% penetration rate as opposed to 67% a year ago. EBITDA, meanwhile, improved by 2% with margin inching higher by 20bps to 36.0% as a result of cost efficiencies. The group’s bottom-line, however, turned to the red to -Rp64b (vs. Rp114b CNP in 2H17) due to lower EBIT as a result of higher D&A charges. QoQ, XL’s service revenue weakened by 1% in 2Q18 while CNP fall into red to –Rp76b (vs. +Rp12b in 1Q18) due to higher interest cost and lower tax benefit. Data revenue accounted for the majority of service revenue at 79% vs. 67% in the same period last year.

Focus on strategy execution in tough environment. Competition remains intense with aggressive data package offerings by competitors to grab market share. XL believes those offerings are unsustainable and unhealthy for the industry. Post the completion of the prepaid SIM registration process (completed on 1-May), XL has made some positive moves and hopes for a better pricing environment for the industry moving forward. The group is set to continue 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. XL 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.

Fine-tuned FY18 guidance. XL managed to secure almost its entire revenue generating base during the prepaid SIM registration process and had the highest percentage of customers registered of its overall base amongst operators. With that, the group is expecting its annual revenue to grow higher (vs. in-line previously) than the industry average (at negative growth). Its EBITDA margin guidance, meanwhile, remains unchanged 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.

AXIATA’s SoP-derived target price lowered to RM4.95 (vs. RM5.00 previously). Post review, we have reduced our XL’s FY18E/19E PATAMI by 68%/39% (to Rp209b/Rp645b) after revising our D&A and OPEX assumptions. Besides, we also revised our FY18E/19E IDR/RM exchange rate to 0.29 (vs. 0.30 previously). With that, we have reduced our Axiata’s FY18E/19E earnings by 3%/2% post imputing XL’s numbers. Meanwhile, 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 RM4.95 (vs. RM5.00 previously). Maintain OUTPERFORM rating.

Source: Kenanga Research - 1 Aug 2018