XL’s  1Q results were  broadly in line.  We raise Axiata’s FY15F  EPS by 1.4% following lower capex assumptions at XL, which results  in lower depreciation charges. We also tweak Axiata’s FV marginally to MYR6.65 (previously MYR6.60)  following a  sight revision in  XL’s  FV to IDR4,700 from  IDR4,400.  As  Axiata’s  short-term  earnings  outlook  remains clouded by the XL-Axis merger, we maintain NEUTRAL on Axiata.

• Tepid start for XL. Axiata’s 67%-owned subsidiary, XL Axiata (EXCL IJ, NEUTRAL,  FV:  IDR4,700),  posted  a  1Q14  core  net  loss  of  IDR15bn. However,  we  note  that  its  1Q  core  earnings  include  an  IDR232bn realised  forex  loss  from  USD  debt  hedging.  Excluding  this  forex  loss, XL’s 1Q would have been broadly in line with expectations.
• Revenue  growth  resumes  momentum.  XL’s  1Q  revenue  increased 1.1%  q-o-q  (4Q13:  -1.1%),  as  stronger  data  growth  of  5.6%  (4Q13: +4.3%) mitigated a seasonally slower quarter for voice (-4.6%) and short message service  (SMS)  (-2.1%).  Q-o-q,  while  EBITDA fell only 1.2  ppts to 39.9%, XL recorded a core net loss of IDR15bn due to  an  IDR232bn realized forex loss from USD debt hedging.
• Outlook. XL’s 1Q14 only reflects 12 days of consolidated financials, with losses from Axis estimated at IDR64bn over that period. The real extent of losses at Axis  (for a full quarter)  is  still uncertain. Still, management reiterated its guidance that the XL-Axis merger will be earnings-accretive by  FY16.  XL  now  has  control  of  Axis’  spectrum,  and  has  begun  early efforts  to  improve  voice  quality  at  congested  areas,  which should  help pricing power. Management maintained  its EBITDA margin guidance in the  mid-30s,  and  expects  some  cost  reduction  in  2H  upon  fully integrating both networks by year-end.
• Forecasts.  We increase Axiata’s FY15F  EPS  by 1.4%  following a 15% upgrade in XL’s FY15 EPS. We make no change to FY14F EPS.
• Investment case.  We maintain NEUTRAL on Axiata but tweak our SOPbased  FV  to  RM6.65.  Axiata’s  FY14  earnings  growth  outlook  remains cloudy  due  to:  i)  XL’s  continued  challenges  in  monetising data,  and  ii) XL’s earnings dilution following its acquisition of Axis. We expect to see a meaningful earnings recovery for Axiata only in FY15.

Source: RHB