XL Axiata (XL)’s 9MFY19 normalised earnings performed within our expectations. The group continued to gain market traction from its dual-brand strategy and upselling data-driven products. The ex-Java region also offers potential to tap into a larger customer base. Maintain OUTPERFORM and SoP-driven TP of RM4.80.

XL Axiata’s (66.36% wholly owned) 9MFY19 normalised net profit of IDR505m performed within our expectation but above consensus, making up 77% and 91% of respective full-year estimates. The positive deviation against consensus is likely owing to the betterthan-expected cost efficiencies and effective data-driven strategies which propelled 2QFY19 results being extended into 3QFY19.

YoY, 9MFY19 revenue of IDR18.7t (+11%) was backed by stronger service revenue (+16%). Blended ARPU stood solid at IDR34k (from 9MFY18: IDR30k) from data monetisation and upselling of its customer base. Total subscribers grew by 3% to 55.5m thanks to an increasing market share from consumers outside Java with a higher smartphone penetration rate of 86% (from 9MFY19: 78%). EBITDA-wise, the group saw a 19% growth with margin of 39.3% (+2.9ppt) thanks to lower interconnection charges and other direct expenses. Subsequently, 9MFY19 normalised earnings registered at IDR505b (from 9MFY18 normalised losses of IDR67b).

QoQ, 3QFY19 revenue rose by 3% with service revenue improving by 4%. Although XL’s total subscriber base was lower by 1.1m, this mainly came from higher competition in the low value prepaid segment and hence did not reflect meaningfully to the group’s top-line. 3QFY19 registered a normalised net profit of IDR214m (-4%), with the decline faulted by higher taxes (36.5%, +4.5ppt) during the period.

Taking the stage. Despite competitive pressures in the prepaid segment, XL remains steadfast in its position with successful upselling strategies via dynamic product pricing. The group’s dual-brand strategy also works towards catering to different demographics with varying needs. Meanwhile, the ex-Java market continues to bring growth opportunities, which management indicates to account for c.20% of total revenue. Updates on the base station footprint puts XL’s total at 129k sites of which 30% are feeding 4G coverage. Management is also emphasising on continual investments in transmission, backhaul and upgrade. We believe such efforts would provide the greater speed and customer experience needed to fuel the group’s upselling strategies and to drive demand for data offerings.

Post-XL results, we tweak our FY19E/FY20E earnings higher by 2.3%/0.5% after incorporating XL’s results.

Maintain OUTPERFORM and SoP-driven TP of RM4.80. Our SoPdriven TP implies a 5.6x FY20E EV/Fwd EBITDA, which is -1.5SD below the stock’s 3-year average. Sentiment for AXIATA’s stock remains clouded following the cancellation of the merger with Telenor. However, we see a tactical opportunity as the group is in the spotlight surrounding talks of smaller sized deals. Even if this does not come to pass, we opine its growing regional foothold and cost savings-driven initiatives beyond FY19 could be safe bet for investors, post FY18’s noisy year of impairments and adjustments.

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

Source: Kenanga Research - 4 Nov 2019