XL Axiata (XL)’s 1QFY20 normalised earnings of IDR58b (-16%) was below estimates mainly due to higher depreciation. In anticipation of challenges in customer acquisition and pressures amidthe Covid-19 pandemic in the Indonesian market, we easeour assumptions for XL, resulting in a -6%/-2% revision to our group level estimates. Maintain OP but with a lower SoP-driven TP of RM4.50 (from RM4.70).

XL Axiata (66.4% owned)’s 1QFY20 normalised net profit of IDR58b missed expectations, merely accounting for 8%/6% of our/consensus full-year expectations. The negative deviation arises from higher-than-expected depreciation charges, likely from the group’s aggressive capex rollout. On a pre IFRS 16 basis, normalised profits still only make up 13%/11% of estimates.

YoY, 1QFY20 achieved revenue of IDR6.50t (+9%) on the back of stronger service revenue (+11%). This came from larger subscribers base for Prepaid at 54.34m (1QFY19: 54.01m) and Postpaid at 1.15m (1QFY19: 1.05m) with a higher blended ARPU of IDR36k (1QFY19: IDR33k). The group has been successful with its upselling strategies to cater to data-hungry consumers while reaching to the ex-Java markets. While core EBITDA registered at IDR3.18t (+40%), core net earnings came in at IDR58b (-16%). This could be attributed to the higher depreciation exposure during the period, having aggressively rolled out infrastructure expansion plans during subsequent quarters. Normalised adjustments included IDR33b in forex gains and IDR1.43t tower disposal gains.

QoQ, 1QFY20 revenue tipped slightly (+1%) but registered a 73% decline in core earnings similarly owing to higher depreciation recognition. On a pre-IFRS 16 basis, 1QFY20 would have also registered lower earnings at IDR113b (-47%). The period also saw a slightly lower subscriber base from the loss of Prepaid customers (55.5m vs 4QFY19: 55.6m) but was lifted by higher Postpaid subscribers at 1.2m and ARPU of IDR114k (4QFY19: 1.1m, IDR109k).

Bracing for a storm. While XL had previously stayed away from engaging in price war started by other incumbent players, it has finally followed suit to maintain its competitiveness in customer acquisition, particularly with unlimited data plans abound. However, growing digitalisation could pose as a benefit to the group with easier access to customers and operating expenses as opposed to physical sales. On the flipside, to curb the spread of the Covid-19 pandemic, border control initiatives have been enforced, which have scattered the residents of densely populated areas to sub-urban regions. This could test the infrastructure capabilities of these regions with the sudden influx of network usage, though management assures that its capacity is only half utilised. Concerns over a prolonged movement controls might result in loss of income especially for the lower income bracket, which could dent ARPU and subscriber numbers in the near-term. Earlier guidance has been withdrawn for now, which were for: (i) revenue growth in-line with the market (which we believe to be at the low-mid single digits), and (ii) EBITDA margins of “low 40%”.

Post-XL results, we tweak our FY20E/FY21E earnings by-6%/-2% as we increase our depreciation charges for XL and tone down our subscription growth assumption.

Maintain OUTPERFORM but with a lower SoP-driven TP of RM4.50 (from RM4.70). Our lower TP is mainly resulting from lower DCF assumptions towards XL post-results updates, implying a 5.2x FY21E EV/Fwd EBITDA (1.5SD below the stock’s 3-year mean). While some investors might be wary of Covid-19’s impact towards the resilient telecommunications sector, we postulate that AXIATA’s regional diversification could soften the blow from any downswings its OpCos may face. Additionally, the group has been previously tightening its expenses to enhance its operating efficiency, which could be timely and tested in this current landscape.

Source: Kenanga Research - 12 May 2020