Axiata expected to focus on emerging countries with growth potential

Axiata Group Bhd
(Feb 11, RM4.37)
Maintain hold with an unchanged target price (TP) of RM4.56:Axiata Group Bhd’s 66.4%-subsidiary PT XL Axiata Tbk’s fourth quarter ended Dec 31, 2019 (4QFY19) core net profit (CNP) of 214 billion rupiah (RM64.71 million) — flat quarter-on-quarter (q-o-q) and +269% year-on-year (y-o-y) — brought FY19’s total to 719 billion rupiah (versus FY18’s -9 billion rupiah) — 113% of consensus’ full-year forecast.

This outperformance was attributable to lower-than-expected depreciation and amortisation (D&A) and interest expense. One-off items include a foreign exchange (forex) loss of 13 billion rupiah and a property, plant and equipment disposal gain of six billion rupiah.

Q-o-q, XL’s turnover eased 1% as a flattish data revenue was overwhelmed by a 10% drop in non-data revenue. Market competition has intensified going into end-2019 with several players aggressively pushing products at cheaper prices.

However, XL’s core bottom line was flat at 214 billion rupiah on improved earnings before interest, taxes, depreciation and amortisation (Ebitda) margin with savings in interconnect or direct, staff and infrastructure costs.

Y-o-y, XL’s top line grew 6% supported by service revenue up 11%. Data was the main revenue driver with a 22% gain, while legacy services still declined. An improved Ebitda margin of 41%, versus 4QFY18’s 39%, on a discipline cost structure and a lower D&A led XL’s CNP surging 269%.

Year to date, XL’s turnover grew 9% supported by a 15% gain in service revenue. Data revenue expanded 28% at legacy services’ expense, down 36% as more usage migrated from voice to data. Data — 89% of service revenue for FY19 — is in a more resilient position versus peers’ to weather declining legacy revenues’ effects. Its bottom line turned profitable versus FY18’s -9 billion rupiah, as the Ebitda margin inched up three percentage points to 40% against FY18’s 37%, and a lower net-of-one-off D&A of -12%.

XL’s total subscriber base gained 1.2 million or +2% q-o-q to 56.7 million subscribers despite an increased price-focused competition.

Most of the net additions came from the prepaid segment, while the post-paid only added 11,000 subscribers. XL’s prepaid segment’s average revenue per user was flat q-o-q at 34,000 rupiah, while the post-paid’s eroded 2% q-o-q or 2,000 rupiah to 109,000 rupiah.

With the improved coverage, 88% of XL’s total base or 50 million are data users generating 3,320 petabyte of total traffic in FY19, up 51% y-o-y. As affordability increased, smartphone users also grew 6% y-o-y, reaching 49 million users or 86% of the total base.

XL continued to invest to provide high quality Internet services, especially ex-Java, by adding third-generation (3G) and 4G nodes by 116 and 968 q-o-q respectively in 4QFY19, bringing the total base stations to about 130,000.

The long-term evolution wireless broadband communication is now available in 425 cities and areas across Indonesia with more than 40,000 Evolved Node B. XL is continuing to invest in fiberising its networks to handle rising data traffic as well.

Our FY20 guidance for XL are revenue growth to be in line with the market, an Ebitda margin of a low 40% and a capital expenditure of about 7.5 trillion rupiah.

Our forecasts are maintained pending an analyst briefing in conjunction with Axiata’s 4QFY19 results announcement slated on Feb 21, 2020.

Axiata remains a “hold” with an unchanged sum-of-parts-derived TP of RM4.56. We like Axiata’s regional exposure focusing on emerging countries, with great growth potential.

However, regulatory and execution risks are major concerns. Asset monetisation through tower listing is a catalyst. — Hong Leong Investment Bank Research, Feb 11