While  XL’s 2QFY13  results  disappointed  again,  we  believe  most  of  the downside  had  been  priced  in  (XL  comprises  15%  of  Axiata’s  SOP valuation). We believe the impact on Axiata’s share price will be limited as we expect XL’s earnings to improve in 2H13. We  trim  Axiata’s SOP FV  to  MYR6.55  (from  MYR6.60  previously),  after  lowering  XL’s FY13-FY14 earnings by 9%-15% and FV to IDR4,600 (from IDR5,050).  
 
- XL  falling  short  again.  Axiata’s  67%-subsidiary,  XL  Axiata  (EXCL  IJ; NEUTRAL, FV: IDR4,600) posted 1HFY13 core net profit of IDR749bn (-51.4%  y-o-y),  which  was  below  our  and consensus  expectations  due  to lower-than-expected revenue growth momentum.  

- Moderate  pick-up  in  2Q.  2Q  revenue  increased  4.9%  q-o-q  due  to higher  price  points  and  a  larger  subscriber  base  (+5.1m),  besides  1Q being seasonally weaker. Q-o-q, voice and SMS both improved by 6.1% while  data  &  VAS  grew  6.7%.  EBITDA margin saw  a  marginal uptick  of 0.2  ppt  q-o-q  to  40.6%  despite  greater  scale  primarily  due  to  higher infrastructure expenses (+5.5%). All in, 1Q core net profit jumped 19.6% q-o-q due to lower interest expenses and effective tax rate.

- Outlook.  Management  revised  FY13  revenue  growth  guidance  to  mid-single digit (7%-9% previously), which we think partly reflects the rather gradual  improvements  in  operating  metrics.  We  believe  the  revised guidance may be a stretch since it implies sequential revenue growth of at  least 8% in  the  remaining  two  quarters,  while  Management  prefers a cautious route to recovery rather than an aggressive one.  

- Forecasts. We have reduced Axiata’s FY13-FY14 earnings forecasts by 2%-4% after lowering XL’s earnings  growth  by  9%-15%  to  reflect  lower revenue growth assumptions and higher marketing costs.

- Investment  case.  Maintain  NEUTRAL  on  Axiata  with  revised  sum-of-parts  (SOP)  FV  of  MYR6.55  (from  MYR6.60)  after  trimming  XL’s FV  to IDR4,600  (from  IDR5,050  previously).  Axiata’s  FY13  growth  outlook remains  challenging  due  to  underperformance  at  XL,  but  growing dividends will likely support the stock. 

Source: RHB