XL AXIATA (XL)’s 1QFY22 CNP of ID171b came in below expectations. Top-line saw an 8% improvement driven by improvement in both Prepaid Subs and ARPU but Earnings were dragged by higher expenses. Looking ahead, we expect XL’s continued push of its convergence proposition to drive subs growth and stickiness in supporting top-line. The competitive landscape in Indonesia looks gradually easing, reducing the risk of further price wars. TP reduced to RM4.25 as we ascribed a lower Enterprise Value for XL. We maintain AXIATA at OUTPERFORM for its digital and regional exposure, which will partially benefit from the easing competitive landscape in Indonesia.

Below expectation. 1QFY22 CNP of IDR171b (-26% YoY, -36% QoQ) came in below expectations accounting for 14%/12% of our/market full- year estimates. The sharp negative deviation stemmed from elevated COGS & OPEX which dragged EBIT margin to 11% vs. our assumptions of 13%.

YoY, 1QFY22 revenue improved +8% to IDR6,742b underpinned by strong growth from Service Revenue (+11%) to IDR6.3b. Prepaid ARPU users saw a moderate uptick (+1%) to 55.6m vs. Postpaid ARPU growing 15% to 1.4m. Prepaid ARPU saw a 9% jump to IDR36k/month vs. Postpaid ARPU falling 9% to IDR98k/month. Capex jumped 30% to IDR2.5b which saw higher D&A expenses (+6%) to IDR2.6b. Compounded by a higher ETR of 19%, CNP fell 26%.

QoQ, 1QFY21 CNP was weighed down by weak top-line (-3%) which dragged EBIT margin by 4ppts to 12%. Subscribers saw 2% decline underpinned by falling Prepaid Subs (-2%). Blended ARPU fell 3% dragged by falling Postpaid ARPU (-8%) vs. Prepaid ARPU which remained flat.

Easing of the pandemic is likely to support growth. Management guides for capex at IDR9,000b (from our earlier assumption of IDR7,500b with EBITDA margin expected to remain the below the 50% for FY22E. XL’s proposed purchase of 66% stake in Linknet is expected to be completed by 3QCY22 with regulatory approval positively progressing. Meanwhile pandemic cases continue to be on a downward trajectory allowing further movement relaxation. The digital lifestyle formed during the recent pandemic is expected to create structural demand for data with increased demand for FTTH services due to higher consumption patterns and the market is relatively still underpenetrated. Do note that 1Q is historically a soft quarter for XL Axiata. However inflationary pressures might erode consumer purchasing power.

Post results, we slashed AXIATA’s Group FY22E earnings by 8% to RM1.2b on account on lower contribution from XL AXIATA.

SoP-driven TP of RM4.25. We reduced AXIATA’s TP to RM4.25 (RM4.30 previously) as we reduced our FY22E Enterprise Value to RM62.5b (<1%) as we ascribed a lower Enterprise Value for XL AXIATA. We maintain Axiata as our telco sector’s top pick for its digital and regional exposure, which will partially benefit from the easing competitive landscape in Indonesia and a clear path for continued growth through theLinkNet deal. Giving a better dividend yield at this juncture, we maintain our OUTPERFORM rating.

Source: Kenanga Research - 11 May 2022