XL Axiata (XL)’s 9M18 results came in below the street but largely within our expectations. 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 made no changes to our Axiata’s FY18E/19E earnings forecasts, pending on the upcoming results release. Maintain SoP-driven TP at RM4.60 but raise rating to OUTPERFORM.

XL (a 66.4%-owned subsidiary of Axiata)’s 9M18 normalised NL of Rp91b (-127% YoY) came in below consensus but largely within ours, where the street as well as ours were targeting net profit of Rp468b and Rp209b for the full-year, respectively. The lower YoY performance was mainly due to the poorer EBIT as a result of higher D&A charges.

YoY, 9M18 revenue was flat at Rp16.9T as the higher other telecom services (+11% to Rp834b, which comprises mainly leased tower, leased lines and others) was offset by the softer service revenue (-2% to Rp14.6T due to price competition in the 1H of the year as a result of the prepaid SIM registration). XL’s total customer base improved by 1.0m to 53.9m in 3Q18 but with lower blended ARPU of Rp30k (2Q18: Rp31k). Its smartphone users grew to 42.0m with 80% penetration rate as opposed to 72% a year ago. EBITDA, meanwhile, softened by 1% with margin lowered by 20bps to 36.4% due to higher costs incurred as part of the prepaid SIM registration process. The group’s bottom-line, however, turned to the red to –Rp91b (vs. Rp339b CNP in 9M17) due to lower EBIT as a result of higher D&A charges that led by higher network roll-out over the past year. QoQ, XL’s service revenue strengthened by 4.5% (thanks to better data monetization) in 3Q18 with EBITDA strengthened by 9% to Rp2.2T driven mainly by the improvement in revenues and better cost efficiencies. Despite its bottom line still remained in red (–Rp28b due to higher D&A expenses), it has improved significantly from a CNL of –Rp75b in 2Q18. XL’s 4G network covers 387 cities and areas across Indonesia with more than 28k 4G BTS on top of its >50k 3G BTS.

Aiming to finish the year on a strong note. Following the completion of the prepaid SIM registration process in 1H18, the data package pricing environment has seemed gradually become more rational. The group has made moves in monetizing data, which has translated to the strong top-line performance in 3Q18. Moving forward, XL continues to be supportive of further data monetization. With its strong data-led product proposition through a dual-brand strategy supported by continuous network investment for a better data experience, management believes that it could finish the year on a stronger note.

Maintained FY18 guidance, where XL is expecting its annual revenue to grow higher than the industry average (at negative growth) with an aim to achieve high thirties EBITDA margin in view of the on-going cost initiatives. Group’s capex maintained at c.Rp.7T with key spending continue to remain focused on its 4G technology development as well as network improvement, especially in the ex-Java areas.

Rating raise to OUTPERFORM with an unchanged SoP-derived target price at RM4.60. Post review, we have tweaked our XL’s FY18E/19E PATAMI by -42%/0.5% (to Rp122b/Rp646b) after revising our D&As and some OPEX assumptions. With the sharpest-than-expected plunged on Axiata’s share price in October (where the group’s share price has washed by c.25% MoM, the highest monthly dropped since listing), bargain opportunity could be potential arise should the market trading sentiment improve thereafter. Thus, we have raised our Axiata rating to OUTPERFORM (vs. MARKET PERFORM previously) with an unchanged SoP-derived target price of RM4.60. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-than-expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 02 Nov 2018