Review

• XL Axiata announced its FY16 results, reporting a normalised net loss of Rp209bn. Numbers missed our expectations due to weak revenue trends (which made up only 95% of our forecasts) and lower than expected margins.

• XL remains a company in transition. Albeit still weak, service revenue grew for the second consecutive quarter at 1% QoQ. Trends are, however, expected to pick up towards the 2H2017 on better data monetisation efforts. EBITDA decreased 8% QoQ. Margins were at its lowest in seven quarters, driven by a 16% QoQ increase in sales and marketing expenses (aimed at driving revenue). Subscriber growth remains positive for the fifth consecutive quarter, recording 1.5mn QoQ net adds.

• YoY. Service revenue trailed its competitors, declining 4% YoY. A fall in legacy services revenues more than offset growth in data revenues. Apart from that, there were also challenges with distribution channels and brand & network perception gaps. Other revenues fell 26% YoY due to less incoming off-net traffic. Other telecommunication services revenue decreased 4% YoY from foregone tower leasing revenue.

• Data continues to be the key growth driver, now making up 53% of service revenue in 4QFY16 vs. 35% a year ago. Total traffic more than doubling to 503.2PB. Data users now comprise 65% of its subscriber base. Investing in data, the group rolled out its U900 and 4.5G services in the 2H2016.

• EBITDA decreased 4% YoY. Margins, however, improved 1.1pp to 37.8%. Opex narrowed 8% YoY. Savings were derived from lower interconnection & other direct (-17% YoY) and infrastructure expenses (- 11% YoY). However, sales and marketing costs increased 27% YoY. A pickup was seen in the 2H, as it focused on 4G LTE, U900, improving trade visibility and competitiveness in traditional distribution channels. Showing early signs of success, there are some traction in driving revenue outside of Java.

• Flushing out most of the lower value subs, total subscribers increased by 4.6mn individuals. Prepaid ARPU was flat (Rp34k), but postpaid ARPU increased 8% YoY to Rp116k. Negatively, both postpaid and prepaid ARPU have been on a declining trend since 1QFY16, due to a faster fall in legacy services.

• As part of its balance sheet management initiative, net debt/EBITDA decreased to a healthier 1.6x (from 2.8x a year ago). All external USD loans are also fully hedged till maturity.

Outlook

• The group expects revenue growth to be in line with the market in 2017 (high single digits). This will be dependent on data monetisation efforts, of which its peers have begun to implement. Huge bonus data quota are starting to be reduced. Efforts will also be placed on building brand equity for XL, while there is still work to be done to expand the reach of its distribution channels. It plans to grow in line with the industry by 2Q2017 and outpace it by 3Q2017. EBITDA margins is expected to be maintained at the high 30’s. Sales and marketing expenses are likely to remain elevated in the next one to two quarters. Additional cost savings can be achieved from the renewal of tower sites to lower lease rates. Lastly, capex is unlikely to exceed Rp7.0trn.

Impact

• Leave our earnings estimates unchanged, pending the release of Axiata’s full year results.

Valuation

• We maintain our TP for Axiata at RM5.35/share – based on a SOP valuation. Immediate opportunities for the group are a turnaround at Celcom and XL. While there are risks involved in achieving this, we believe it has been priced in at current levels. The group is trading close to 1SD below its historical average EV/EBITDA at 6.7x. Forward dividend yields are also decent at 3.3-4.1%. BUY.

Source: TA Research - 2 Feb 2017