XL’s 1QFY13 results were sharply below our and consensus expectations. While management has seen operational improvement since Feb and expects this to continue, we think risks remain if it continues to position itself away from its core “affordable” branding. We cut Axiata’s SOP fair value to RM6.40 (from RM6.60) following downgrades in XL’s earnings and fair value. Maintain Neutral on Axiata.

¨      XL falls short. Axiata’s 67%-subsidiary, XL Axiata (XL), posted 1QFY13 core net profit of IDR341bn (-54.2% y-o-y), which was sharply below our and consensus expectations due to lower-than-expected revenue growth.

¨      Weak 1Q. 1Q revenue dropped 3.3% q-o-q, due to lower price points and seasonality. Q-o-Q, despite a larger subscriber base (+3.4m), lower pricing led to a sharp decline in voice (+11.6%) and SMS (-6.3%). Data & VAS grew 6.9% q-o-q but clearly was insufficient to lift overall revenue. EBITDA margin fell 3.9-ppts q-o-q to 40.4% mainly from lower scale and higher infrastructure expenses. All in, 1Q core net profit fell 43.4% q-o-q. 

¨      Outlook. Despite a weak 1Q, management reiterated its FY13 revenue growth guidance of in line or above industry (7-8%) and EBITDA margin of low 40s. Revenue growth should pick up in the coming quarters as XL continues to see traction in regaining subscribers lost last year, in tandem with upward tweaks in pricing. Management has seen these operational improvements since Feb, and expects the momentum to continue in 2Q. However, we think risks remain as XL’s larger base of price-sensitive subscribers renders it difficult for XL to position itself away from “affordable” to “premium”.

¨      Forecasts. We have reduced Axiata’s FY13-14 earnings forecasts by 4-8% after lowering XL’s margin and growth assumptions.

¨      Investment case. Maintain Neutral on Axiata with revised SOP fair value of RM6.40 (from RM6.60) following the cut in XL’s fair value to IDR5,050 (from IDR6,000). Growth for Axiata looks challenging, but growing dividends will likely support the stock. An unexpected Myanmar license win and a quick turnaround in XL’s performance are re-rating catalysts.

Source: RHB