XL AXIATA (XL)’s 3QFY21 revenue and EBITDA came within our expectations, but CNP outperformed on lower-than-expected D&A and tax expenses. XL continued gaining subs from the easing competition and popularity of its XL Satu Fiber convergence services. Amidst the benign competition, XL is looking to raise prices to lift ARPU, which we think risks dampening subs growth. Nevertheless, XL continues to bank on its pending LinkNet acquisition to stand out. It is also currently in discussions with other operators for a 5G network sharing agreement. We maintain our Axiata Group’s earnings estimates post-XL’s 3QFY21 results, and maintain our OUTPERFORM call with SoP-TP of RM4.45. 

9MFY21 above our estimates. 9MFY21 CNP of IDR835 (+63% YoY) came within street’s estimate at 73%, but above ours at 93%, of full year estimate. The deviation was mainly due to the lower-than-expected D&A expense and tax rate, as its revenue and EBITDA came in-line at 75% of our full-year estimate.

YoY. 9MFY21 revenue inched up 1% on a 4% increase in prepaid subs and 11% increase in postpaid subs. While postpaid ARPU fell 5%, the impact was insignificant compared to the 3% rise in prepaid ARPU. PBT fell 49% as 9MFY20 saw a non-recurring IDR1.97t gain from tower sale and a net forex gain of IDR10.6b. After accounting for these non-recurring items, 9MFY21 CNP rose 63%.

QoQ. Revenue rose 1.5% on: (i) 3% growth in postpaid subs, which negated the 3% drop in ARPU, and (ii) 2% growth in prepaid subs, on the back of stable ARPU. EBITDA rose in tandem by 1.5%. Higher operating expenses and tax expense weighed heavily, dragging CNP by 18%.

Easing competition and price hikes. Since Telkom’s easing of its aggressive pricing strategy earlier in the year, the price competition in the market has eased. To lift data yields, in October, XL began to raise prices and reduced benefits of its products. While we think this could help lift ARPU in the near term, it may dampen subs growth, as subs have been leaning towards cheaper packages with higher data quotas.

M&A and network sharing. Currently, XL is still in discussions with LinkNet on the proposed acquisition, which would help XL strengthen their convergence proposition. XL’s convergence product – XL Satu Fiber – is the first of its kind in a market new to the concept. This proposition – which is predominantly targeted towards families – should help XL to differentiate itself from peers and lift postpaid ARPU. XL’s management has also indicated that they are in discussions with other operators for a 5G network sharing arrangement. We suspect XL may be in discussions with SmartFren (as hinted from earlier rumors) as the Indosat Tri merger leaves XL and SmartFren in the third and fourth place in the market (based on subs base), respectively.

Post XL’s 3QFY21 results, we are keeping our Axiata Group estimates, pending group-level results on Nov 26.

Maintain OUTPERFORM with SoP-driven TP of RM4.45. We think investors will continue to favour Axiata for its regional exposure and Celcom’s recovery in the prepaid segment. For the upcoming Axiata Group results, barring any non-recurring items, we expect QoQ growth, lifted by continued subs and ARPU recovery regionally. In our view, the recent knee-jerk sell-off induced by the prosperity tax in Malaysia presents a good buying opportunity.

Source: Kenanga Research - 10 Nov 2021