XL AXIATA (XL)’s 1QFY21 normalised profit of IDR230b is within our/street’s expectation. Prepaid subscribers decreased QoQ on SIM consolidation but showed steady YoY growth on continued growth momentum in the ex-Java region. The potential mergers (Indosat and Hutchinson 3, Digi and Celcom) are positive for Axiata as competition in both markets could ease, potentially arresting further ARPU declines and improving profitability. Maintain OP for AXIATA with an unchanged SoP-driven TP of RM4.40.

1QFY21 within expectations. 1QFY21 CNP of IDR230b came within expectation at 26%/24% of our/street's FY21 estimate. Revenue of IDR6.25t also came in within at 24% of our full-year estimate. EBITDA margin came in at 50% vs. our full-year estimate of 47% on cost- efficiencies.

YoY. Revenue shed 4% as prepaid ARPU fell to IDR33k from IDR34k as the popularity of competitors' (namely Telkomsel) latest unlimited prepaid products continued diluting prepaid ARPUs. Prepaid subscribers continue to inch up with 500K net addition as XL's high- speed proposition continued to pay off while ex-Java segment continued to grow. Postpaid (only 2% of total) subs remained flat while ARPU declined from IDR114k/month to IDR108k/month. EBITDA fell by 2% as EBITDA margin improved from 49% to 50% on cost savings. PBT fell by 75% as 1QFY20 saw one-off tower disposal gains of IDR1.43t. CNP rose by c.300% as 1QFY20 experienced higher depreciation and 1Qs also tend to be seasonally weak, making 1QFY21 a commendable one.

QoQ. Revenue declined 1.7% despite stable prepaid ARPU (IDR33k/month), as prepaid subs declined from a spike in subs growth in 2HFY20, when management witnessed an unsustainable jump in dual-SIM users. Postpaid subs inched up 31K to 1.2m and postpaid ARPU fell by IDR2k/month. EBITDA fell with in tandem with revenue, by 1.5%.

Indosat and Hutchinson 3 merger. Management believes that the merger will adjust industry competition to a healthy level and help boost telcos' profitability. While the combined spectrum of the MergeCo may allow it to provide better services to customers, XL is not fazed as they continue their momentum to penetrate the ex-Java region, and looks to grab market share from MergeCo while they are in discussions.

Post XL’s results, we maintain our estimates for XL and AXIATA Group.

Maintain OUTPERFORM with an unchanged SoP-driven TP of RM4.40. Our TP implies an EV/EBITDA of 4.5x, close to 1.5SD below AXIATA’s 3-year mean of 4.6x. XL’s performance is holding up well in the face of fierce competition, and we continue to believe that Axiata’s regional OpCos stand to benefit from subscriber growth, especially in Indonesia and Bangladesh, as they recover from the pandemic. Axiata’s portfolio of digital services, while not all profitable yet, continue to provide the Group exposure to promising digital growth opportunities to complement its telecom businesses. The Celcom Digi merger may also bring competition in the Malaysian telecom sector to a healthier and more profitable level, as having one less competitor could help players arrest further ARPU declines.

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

Source: Kenanga Research - 28 Apr 2021