XL AXIATA (XL)’s 2QFY21 core net profit of IDR333b brought 1HFY21 CNP to IDR563b, exceeding expectations by making up 66%/72% of our/street’s FY21 estimate. Notably, XL’s prepaid ARPU saw impressive growth on the back of: (i) family and youth plans, (ii) network improvements, and (iii) easing competition. Moving forward, XL looks to push its converged offerings, with the potential acquisition of Link Net as a key strategic move. That said, the renewed lockdowns in Indonesia could be near-term hindrance to subs and ARPU growth. With XL’s strong 2QFY21, we raise Axiata’s FY21E CNP by 3%. Maintain OP and TP of RM4.45 for AXIATA Group.

1HFY21 above expectations. 1HFY21 CNP of IDR563b (+210% YoY) came above our/street’s expectations, making up 66%/72% of our/street’s FY21 estimate. The deviation was mainly due to lower than-expected interest cost and tax rate, as revenue of IDR13t and EBITDA of IDR 6.5t came within at 49% of our full-year estimate.

YoY. Revenue fell 1% as the 4%/1% drop in postpaid/prepaid ARPUs outweighed the 6%/3% gain in postpaid/prepaid subs. PBT fell 56% as 1HFY20 saw a non-recurring IDR1.9t gain from tower sale and a net forex gain of IDR23b. After accounting for these non-recurring items, CNP rose 210%.

QoQ. Revenue rose 8% on: (i) 4% growth in postpaid/prepaid subs and (ii) 9% rise in prepaid ARPU. Notably, prepaid ARPU rose on: (i) strong traction of its ARPU-accretive family and youth products, (ii) better service quality on network improvements, and (iii) easing competition from Telkomsel. EBITDA rose in tandem by 8%. A lower interest expense helped lift PBT by 16% while a lower effective tax rate boosted CNP by 45%.

Acquisition of Link Net is part of XL’s convergence strategy. As we had earlier surmised, the Link Net acquisition would allow XL to strengthen their presence in the fixed broadband space, as they would be acquiring the second largest fixed broadband operator in Indonesia, only behind the Telkom’s IndiHome. The acquisition would provide XL 4.7x more homes passed (XL: 580K) and 5x the number of fixed subs (XL: 174K). Post-acquisition, XL’s strong presence in the fixed broadband space would strengthen its fixed and mobile convergence propositions. Management also does not discount the possibility of more fixed operator M&As in the future to further strengthen its fixed broadband presence. Moving forward, we expect the convergence bundles to remain popular among subs, mainly driven by the strong demand for home broadband, including in ex-Java regions.

Potential lockdown headwinds. With the renewed lockdowns in Indonesia, we expect: (i) the closure of distribution channels to hamper subs acquisition, and (ii) ARPUs to remain flat QoQ as lower disposable incomes may weigh on said factors driving ARPU growth.

Post XL’s impressive 2QFY21 results, we raise XL’s FY21E CNP by 5% from IDR853b to IDR899b, and Axiata’s FY21E CNP by 3%. Maintain OUTPERFORM with an unchanged SoP-driven TP of RM4.45, as the earnings tweak impacts our valuation of XL insignificantly. Currently, our XL’s DCF-TP implies a 5x EV/FY22 EBITDA, which is at a +0.5SD above its 5-year mean. For the upcoming Axiata Group results, barring any non-recurring items, we expect QoQ growth, lifted by (i) XL’s strong results and (ii) subs growth and ARPU recovery in its regional OpCos.

Source: Kenanga Research - 6 Aug 2021