XL Axiata (XL)’s 1H19 normalised earnings came above expectations, led by a better operating cost environment amidst strong subscriber growth. Near-term outlook appears to be similarly driven, as customer upselling picks up while a greater presence in the ex-Java region could pave the way for more new customers. Adjusting for higher earnings from XL, our SoP-driven TP is raised to RM4.55 (from RM4.30). Maintain UNDERPERFORM.

XL Axiata’s 6M19 results came above. XL’s 6M19 normalised net profit of IDR291b was above both our and consensus expectations, making up 74% and 60% of respective full-year estimates. While 6M19 gross revenue met our expectation, better cost efficiencies and dual brand strategies led to the positive earnings deviation.

YoY, 1H19 revenue increased to IDR12.3t (+11%), propelled by better service revenue (+15%). The positive traction was yielded by higher blended ARPU of IDR34k (from 1H18: IDR31k) from data monetisation and upselling of its customer base. Total subscribers also increased by 7% to 56.6m, which could be driven by larger market share captured outside Java and higher smartphone penetration of 86% (from 1H18: 84%). In terms of EBITDA, a 19% growth and margin expansion to 38.7% (+2.7ppt) was mainly thanks to lower interconnection charges despite the higher topline, coupled with lower marketing expenses. Overall, normalised net profit for 1H19 registered at IDR291b (from 1H18: normalised losses of IDR49b).

QoQ, 2Q19 revenue improved by 5% to IDR6.3t, supported by a 1.5m stronger subscriber base. EBITDA also expanded by 8%, as efficient management of infrastructure expenses led EBITDA margin to record at 39.3% (+1.2ppt). Consequently, 2Q19 normalised net profit closed at IDR222m (+c.200%).

Keeping the momentum going. XL appears to be seeing returns from its investments in expanding its ex-Java presence. This should be supported by the group’s network upgrades for continual growth in network capabilities and coverage. As of 1H19, XL manages nearly 128k base transceiver stations, nearly doubling its 66.4k footprint in 1H16. This could further fuel the group’s ability to stay with its strategy to upsell to its customers and monetise data offerings. With this, management has kept their FY19 guidance unchanged; (i) perform better than or at least in line with market, (ii) achieve high 30’s EBITDA margin, and (iii) cash-out capex of IDR7.5t.

Post-XL results, we raise our FY19E/FY20E earnings by 3.3%/4.2%, mainly to incorporate the leaner cost environment of XL operations to the Axiata Group.

Maintain UNDERPERFORM but with a higher SoP-driven TP of RM4.55 (from RM4.30, previously). Our SoP-driven TP implies a 5.5x FY20E EV/Fwd EBITDA, which is close to the stock’s 3-year average. Recall that we downgraded AXIATA to UP on our 3rd July sector strategy report, subsequent to the buying rally sparked by the pending merger between the group and Telenor. We believe the rise in share price could have been overdone, also evident by the stock’s price retracement since the said report by 3.8% versus the FBMKLCI’s 3.0% from the same period. This tactical call was necessary as risks of pullbacks are high post rally given the likely long gestation period on the due diligence process. We await the outcome of MCMC’s announcement expected by end Sep before reviewing our call.

Risks to our call include: (i) stronger-than-expected recovery at Celcom and XL, (ii) better-than-expected costs management, and (iii) better-thanexpected growth from edotco.

Source: Kenanga Research - 2 Aug 2019