XL Axiata (XL’s) FY19 normalised earnings of IDR719b was within our expectations. Strategies of dual-brands, more data-centric products and ex-Java penetration will continue to drive earnings. However, a less upbeat FY20 guidance could suggest market players are ramping up to defend their turf. Stronger EBITDA margin guidance indicates that present lean cost structure should hold, possibly expand. Maintain OP and SoP-driven TP of RM4.80 for AXIATA.

XL Axiata (66.36% owned)’s FY19 normalised net profit of IDR719b performed within our expectation but above consensus, making up 96% and 113% of respective full-year estimates. The positive deviation against consensus is likely owing to the better-than-expected cost efficiencies and effective data-driven strategies which propelled 2QFY19 results being extended into 4QFY19.

YoY, FY19 revenue of IDR25.2t (+9%) stemmed from a growth in service revenue by 15%, tapping into a higher data demand from customers and upselling. During the year, the group expanded aggressively into the ex-Java region which proved successful. Total subscribers grew to 56.7m (98% of which are prepaid) while Prepaid ARPU and Postpaid ARPU came at IDR33k (+10%) and IDR110k (+7%), respectively. Further fuelled by lower interconnection charges but partially offset by higher infrastructure costs with the ongoing network expansion, EBITDA came in at IDR10.0t (+17%) at margin of 39.6% (+2.6ppt). With that, FY19 normalised earnings registered at IDR719b (from FY18 normalised losses of IDR9b).

QoQ, 4QFY19 revenue declined slightly (<1%). Despite a 2% growth in total subscribers, service revenue tipped, possibly due to some ARPU compression from year-end competition. However, cost environment remained relatively stagnant, leaving EBITDA flattish. 4QFY19 normalised profits also came in flattish at IDR214b as lower interest expenses were offset by higher taxes.

Holding the fort. XL’s dual-brand continues to pay off with its ability to serve a wider clientele. Its expansion into the ex-Java market also opens the group up to customers there who previously had to make do with limited celco options. Having wrapped up FY19, management presented a fresh set of guidance for FY20, anticipating revenue growth to be in-line with market (which we believe to be at the low-mid single digits). Possibly reminiscent of the struggles in 4QFY19, the group could be expecting more competitive offerings to persist in the market which may hinder the growth traction currently enjoyed. On the flipside, an EBITDA margin guidance of “low 40%” could indicate that the group is confident in balancing its cost management, having registered two consecutive quarters of EBITDA margin above 40% (FY19 registered 39.6% EBITDA margin vs 37.0% in FY18). However, this may also mean that there is little room for further cost streamlining after having doing so much in FY19.

Post-XL results, we tweak our FY19E earnings slightly by -1%.

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. Fundamentally, we believe the group is poised to benefit from its expansion in regional market and leaner operational structure. Local investors may currently be holding back on telcos awaiting further developments in the national 5G scene. With regards to that, we believe AXIATA may have a shot of being a key participant through Celcom and/or with edotco providing backhaul support. Regardless of its participation, we believe the stock’s earnings growth under current better management to be a good sweetener.

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 - 11 Feb 2020