XL AXIATA (XL)’s 12MFY20 normalised profit of IDR679b (-6%) is within our expectation. Steps to market consolidation, spurred by the omnibus law has materialised with the potential merger of Indosat and Hutchison 3. Amidst this, XL will continue to ride on its strategies in the ex-Java region to maintain its presence and continue investing for quality 4G coverage. Maintain OP for AXIATA with an unchanged SoP-driven TP of RM4.30.

XL Axiata (66.4% owned) posted FY20 normalised earnings of IDR679b,

which is within our expectation, making up 96% of our full-year estimate. No consensus estimates was available on a normalised earnings basis. No dividends were declared, as expected.

YoY, 12MFY20 revenue registered at IDR26.02t (+3%) with service revenue of IDR24.12t (+6%). This was led by gains in Prepaid subscribers to 56.74m users (+1.11m since 4QFY19) driven by effective customer acquisition strategies in the ex-Java region. Meanwhile, ARPUs were relatively flattish. Core EBITDA margin improved to 50.2% (+10.6ppt) but on the back of new IFRS 16 adjustments. At pre-adjustment level, margin still held strongly at 42.6%, thanks to cost savings from digitalisation and lower interconnect charges. 12MFY20 normalised profits came in at IDR679b (-6%) following heavier depreciation charges.

QoQ, 4QFY20 revenue dipped 3% owing to Prepaid ARPU erosion to IDR33k from IDR35k in 3QFY20. However, this was cushioned by growth in Prepaid subscribers of 1.0m QoQ. That said, 4QFY20 normalised earnings declined by 50% to IDR166b in spite of tax gains as operating expenses remained relatively elevated.

Shifting landscape. The Indonesian market is expecting a shake-up with the pending merger of Indosat and Hutchison 3 to consolidate their market presence. While the move could put XL firmly as the third largest telco provider, management aims to continue riding on its working strategies to penetrate into the ex-Java market which was previously much dominated by Telkomsel. Meanwhile, the group looks to repurpose its 3G capacity to boost its 4G capabilities as it reduces its dependency on the 3G network. Management’s guidance for FY21 includes: (i) revenue growth to be in-line with market trends, which is expected to be better than FY20 due to it being the hardest hit by Covid-19’s economic implications; (ii) EBITDA margins at low-50% (FY20: 50.2%); and (iii) capex spend around IDR7t.

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

Maintain OUTPERFORM with an unchanged SoP-driven TP of RM4.30. Our TP implies an EV/EBITDA of 4.6x (1.5SD below its 3-year mean). We opine that AXIATA could benefit from its wide regional exposure and non-cellco business in the medium-term (i.e. Indonesia’s omnibus law opening opportunities for consolidation, digital assets heading towards a turnaround, and fresh injection of funds from its Bangladeshi unit Robi’s IPO potentially accelerating penetration rate). Additionally, in its 5-year plan, the group has strategies in place to drastically drive down its cost/GB and targets to achieve group-wide EBIT margin of 20% (14.4% in FY19). Overall, this should translate to better free cash flows to allow for more generous dividend payments (FY25E target of 20.0 sen, from historical average of 8.0-10.0 sen).

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 - 16 Feb 2021