XL Axiata (XL)’s 1Q19 results came in below expectations, from higher-than-expected finance costs. No dividend was announced during the quarter, as expected. Moving forward, XL maintains its top-line annual growth target performing in-line or better than industry average with EBITDA margin staying at the high thirties. We have tweaked our Axiata’s FY19E/FY20E earnings forecasts by 2.5%/1.9%, respectively, post imputing XL’s numbers. Maintain MARKET PERFORM but with a lower SoP-driven TP of RM4.30.

XL (a 66.4%-owned subsidiary of Axiata)’s 1Q19 normalised NL of Rp69b (vs. 1Q18: Rp16b) came in below expectations and merely accounted for 9%/12% of our/street’s full-year estimates. The key negative variance from our end was mainly due to higher-than-expected finance costs as a result of higher interest on loans and lease liabilities.

YoY, 1Q19 revenue improved by 9% to Rp6.0T, thanks to higher service revenue (+12% to Rp5.4T, as a result of successful upselling coupled with increased monetization of data) but partially offset by the softer Other telecommunication services revenue (-34% to Rp217m due to decline in device revenue and lower interconnect). XL’s total customer base improved by 0.1m to 55.1m in 1Q19 with higher blended ARPU of Rp33k (4Q18: Rp30k). Its smartphone users grew to 46.2m with 86% penetration rate as opposed to 76% a year ago. EBITDA, meanwhile increased by 15% with margin higher by 200bps to 38.1% due to higher revenue coupled with lower S&M expenses and interconnection costs. The group’s normalised net income, meanwhile, improved extensively from a low base to Rp69b (+319%) despite higher finance costs as a result of higher interest on loans and lease liabilities. QoQ, XL’s service revenue strengthened by 2% (thanks to better data monetization) in 1Q19 with lower EBITDA (-3% to Rp.2.3T) and thinner margin of 38.1% (vs. 38.8% in 4Q18), no thanks to higher network costs.

Focus on expanding product portfolio. Moving forward, XL will continue to pursue further data monetization. With its strong data-led product proposition through a dual-brand strategy underpinned by continuous network expansion outside of Java and technology upgrades, management believes growth will be derived from a combination of increased usage and monetization of data, which will drive the databased revenue eventually.

Maintained FY19 guidance, 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.

Maintained MARKET PERFORM with a lower SoP-derived target price of RM4.30. Post review, we have revised our Axiata’s FY19-FY20E PATAMI by -2.5%/-1.9%, respectively, post imputing XL’s numbers. Maintained MARKET PERFORM with a lower TP of RM4.30 (vs. RM4.35 previously) post updating Idea’s market price. Our TP implied a -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-than-expected recovery at Celcom and XL, and (ii) better edotco’s organic and inorganic growth.

Source: Kenanga Research - 7 May 2019