We are assured by the group’s efforts to keep profit sustainable with an optimum customer experience. Its 5- year cost savings target of RM5bn initiated in 2017 looks to be on track for 2021. Targeted capex decisions and maintenance of service quality are amongst the frontlines for achieving desired returns. BUY with a TP of RM4.80 implying a 5.6x FY20E EV/Fwd EBITDA. Sentiment for the stock could have been bashed with the cancellation of the merger with Telenor. However, we believe that developments of other potential tie-ins could reinvigorate interest, presenting a decent risk-to-reward backed by a guarded earnings outlook.

Most operating companies (except Celcom and NCell) were boosted by larger subscribers and higher ARPUs, with sustainability held by: (i) better management of network cost across key regions, (ii) digitalising and automating support functions (i.e. sales, customer engagement), and (iii) strategizing capex rollouts and expansion, amongst others. Management guided that ongoing efforts, since 2017 has so far generated cost savings of RM3.6bn, working towards the earmarked RM5.0bn in 2021.

XL in Indonesia gathered that it could obtain ideal returns by focusing network investments to upgrade “Below Average” cities. We reckon this has to do with higher demand for connectivity there, being scarcely provided while crowded “Above Average” cities could experience fierce rival telco presence. So far, XL and Robi are operating with two brands under their portfolios, XL with Axis and Robi with Airtel, respectively. This aims to cater to different demographics and offer tailored packages plus pricing based on customer needs.

Post-falling out of the mega merger with Telenor, management continues to be open to M&A opportunities. Recent news flow of local partnerships being inked for resource sharing and collaborations, especially with 5G ahead, seem to lead investors on that some sort of consolidation is imminent. The same is seen in Indonesia with operating efficiency and network coverage being much desired. On CK Hutchinson’s (which operates “3”) expression of interest to hold hands with XL, management did not provide any confirmation but indicated that local ministers appear supportive to the possibility.

Source: Rakuten Research - 3 Dec 2019