XL Axiata (XL)’s 9MFY20 normalised earnings of IDR513b (+2%) is within expectation. Price war persists with “unlimited” data plans flooding the market as Covid-19 economic impact is causing affordability concerns. The probability of consolidation is on the rise as Indonesia’s omnibus law takes shape. Until then, XL will continue to focus on internal and network improvements. Maintain MP for AXIATA with an unchanged SoP-driven TP of RM3.20.

XL Axiata (66.4% owned) reported 9MFY20 normalised earnings of IDR513b, which is within our expectation, making up 72% of our full-year estimate. No consensus estimates was available on a normalised earnings basis. No dividends were declared, as expected.

YoY, 9MFY20 revenue came in at IDR19.67t (+5%) with service revenue lifted 8% to IDR18.23t. This was led by a higher blended ARPU of IDR36k (9MFY19: IDR34k) fuelled by greater data needs from movement restrictions amidst the Covid-19 pandemic. EBITDA margin improved to 50.3% (+11.0 ppt) but on the back of new IFRS 16 adjustments. On pre-adjustment level, margin still expanded to 43.4% from digitalisation and lower interconnect charges. 9MFY20 normalised earnings closed at IDR513m (+2%) after accounting for higher depreciation charges.

QoQ, 3QFY20 revenue was flattish. The period saw XL gaining 1.2m new subscribers (almost entirely Prepaid) but saw an erosion of ARPU to IDR36k (2QFY20: IDR37k). That said, 3QFY20 core profit flipped up to IDR331k (+167%) from efficiency gains and interest gains during the period.

Mounting competition. Indonesia’s competitive landscape continues to be relentless as consumers are spoilt for choice with “unlimited” data packages made available by most operators. The price war is worsened by Covid-19 affecting employment and general income of the population. Still, XL appears to be gaining traction in the ex-Java region, which we reckon would be the group’s primary growth point away from the more matured zones. Currently, the industry is abuzz with the omnibus law seeking to improve efficiencies. This brings a rise in the possibility for consolidation as we understand that spectrum rights are transferable, hence is a valuable asset to network quality to newly merged entities. Until XL has a play in this, it strives to invest in operating efficiencies to sustain profitability while prioritising on its 4G coverage to keep customers sticky. Owing to the uncertainties presented by Covid-19, management continues to abstain from providing earnings guidance.

Post-XL results, we leave our FY20E/FY21E assumptions for the group relatively unchanged.

Maintain MARKET PERFORM and SoP-driven TP of RM3.20. Our SoP-driven TP implies 4.2x FY21 EV/Fwd. EBITDA, which is 2SD below the 3-year average. Given the constant drag from the digital segment, cautious subscriber outlook and delay in the national 5G scene, investors might take greater caution, in anticipation of further earnings disappointments. In line with the management’s aspiration to conserve cash, dividend payments could also be less generous in the coming quarters.

Risks to our call include: (i) weaker-than-expected performance at Celcom and regional OpCos, (ii) poorer-than-expected costs management, and (iii) slower-than-expected growth from its digital assets.

Source: Kenanga Research - 6 Nov 2020