Axiata has accepted M1’s offer to exit the Singapore market. On the other hand, XL has reported a disappointing FY18 due to the higher D&A charges and finance costs. All in, we have trimmed our FY18/19E numbers by 2%/6% post imputing XL’s numbers as well as to remove M1 contribution. Maintain OUTPERFORM rating but with a lower TP of RM4.35 after removing M1 from our SoP valuation.

Accepts M1 offer. Last Friday, Axiata announced that it had accepted the voluntary conditional general offer by Konnectivity Pte.Ltd, Singapore, to dispose the entire 28.67% stake in M1 for a total cash consideration of c.RM1.65b at the offer price of SGD2.06 (or c.26% premium over the last traded price of SGD1.63 on 21st September 2018, being the last trading date prior to the announcement of the Offer). The divestment of nonstrategic investment is expected to record an estimated gain of RM126.5m and bring home RM1.65b cash. The proceeds are expected to be utilised for general corporate purposes and/or repayment of existing debts. The proposed disposal is expected to be completed by February 2019.

Divest without petition. Axiata’s investment in M1 commenced in 2005 and the latter had steadily contributed to the Group’s growth over the years with dividends amounting to RM1.1b or c.7% yield in the last 10 years. As of 9M18, M1 has contributed a profit of RM90m (or c.11%) to Axiata’s normalized PATAMI. Despite the short-term challenges with new entrant into Singapore's market, Axiata had remained hopeful on M1’s long-term prospect. However, given Axiata’s inability to extend control either via management representatives or ownership structure, over M1, the group had decided to divest the investment and reallocate the capital to support its vision of becoming the next-generation digital champion by year 2022.

XL - Expediting 2G Assets Reduction. In a separate announcement, XL (a 66.4%-owned subsidiary of Axiata)’s FY18 normalised NL of Rp9b (vs. FY17:Rp741b) came in below expectations, where the street as well as we were targeting net profit of Rp139b and Rp209b for the full-year, respectively. The key negative variance from our end was mainly due to higher-than-expected finance costs. On a sequential performance basis, XL has reported a net loss of Rp3.1T due mainly to the higher D&A charges (Rp4.1T one-off accelerated deprecation cost that associated with the lower 2G traffic). Stripping off the one-off charges, the group reported a core PATAMI of Rp81b in 4Q18 with EBITDA margin improving to 38.8% vs. 37.1% in 3Q18. All in, despite the challenges faced in 4Q18, XL’s ability to perform sequentially coupled with some margins enhancement, suggested that the group is heading in the right direction. (Please refer to overleaf page for more XL’s FY18 result review).

Maintain OUTPERFORM. We have trimmed our Axiata’s FY18-FY19 core PATAMI by 1.5% and 5.7%, respectively, post imputing XL’s numbers as well as to remove M1 contribution. Similarly, we also removed M1’s valuation from our SoP valuation post the divestment. All in, we are keeping our OUTPERFORM call (in view of its relatively decent valuation with Fwd. EV/EBITDA of 7.0x vs. peers of 12-13x) but with lower SOPdriven TP of RM4.35 (vs. RM4.50 previously), implied -0.5x EV/fwd. EBITDA below its 5-year mean.

Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-thanexpected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.YoY, XL’s FY18 revenue was flat at Rp23.0T as the higher data revenue (+13% to Rp15.8T, thanks to successful upselling coupled with increased monetization of data) was offset by the softer non-data segment (-34% to Rp4.1T as a result of declines in legacy service revenue). XL’s total customer base improved by 1.4m to 54.9m in FY18 but with lower blended ARPU of Rp30k (FY17: Rp34k) as a result of competitive behaviour in 1H18. Its smartphone users grew to 43.9m with 80% penetration rate as opposed to 72% a year ago. EBITDA, meanwhile, improved by 2% with margin inching higher by 70bps to 37% due to a prudent cost structure. The group, however, recognised higher D&A expenses (due mainly to the Rp4.1T one-off accelerated depreciation associated to the 2G network) in FY18, leading its bottom-line to turn to the red at Rp3.3T.

QoQ, its service revenue improved by 6% (to Rp5.3T) in 4Q18 with EBITDA strengthened by 8% to Rp2.35T driven mainly by the higher data revenue. The group’s normalised PAT returned to a black at Rp81b (vs. –Rp27b in the preceding quarter) in 4Q18 despite accelerated depreciation on 2G assets. To date, XL’s 4G network covers 400 cities and areas across Indonesia with more than 29k 4G BTS on top of its >51k 3G BTS.

Focus on expanding product portfolio. Moving forward, XL is set to continue with its growth strategy focusing on growing its product portfolio through both brands, supported by network expansion ex-Java and technology upgrades. Growth is likely to be derived from a combination of increased usage and monetization of data. With that, XL expects its FY19 revenue growth to perform in line or better than market (at mid-single-digit growth). Its EBITDA margin is expected to stay at the high thirties in view of the ongoing cost initiatives. The group is targeting to spend c.Rp.7.5T capex in FY19, focused on widening its 4G technology development as well as network improvement, especially in the ex-Java areas.

Source: Kenanga Research - 18 Feb 2019