Company
Update:
XL Axiata (EXCL IJ, BUY, TP: IDR4,000),
A Weak Channel
XL Axiata (EXCL IJ, BUY, TP: IDR4,000),
A Weak Channel
XL’s
execution and channel issues are inevitable as the telco strives to gain higher
yielding subscribers as part of its group-wide transformation initiatives.
Positively, the repayment and refinancing of debt (all un-hedged USD debt
eliminated) has strengthened its balance sheet to pre-Axis levels and we see
lower financing cost in 2H16 as catalysing a recovery in core earnings into
FY17. There is scope for further opex/capex savings from the soon-to-be
approved regulatory framework on active sharing. Maintain BUY with a lowered
DCF TP of IDR4,000 (from IDR4,833, 19% downside) as valuations at 5.2x/4.4x
FY17/FY18 EV/EBITDA are not demanding with the stock’s 30% relative
under-performance YTD.
¨ Channel issues. XL Axiata (XL) cited the poor
distribution of its traditional sales channels as contributing to the sharp 7%
QoQ decline in mobile revenue in 2Q16. It had earlier moved 40% of its
distribution to modern channels which allow for better control of retail prices
and savings in dealer commissions. Management is committed to not “buying”
subscribers for growth, which it believes is an unsustainable model going
forward. We believe the sales of Axis packs have partially cannibalised the
sale of XL packs.
¨
Active-sharing
regulations being finalised. XL said the regulations on active network
sharing is being finalised by the Indonesian Government. It is currently
working with Indosat (ISAT IJ, NEUTRAL, TP: IDR6,700) on the multi-operator
radio asset network (MORAN) sharing model for 4G sites which yields some
capex/opex savings. The greatest savings can be realised from the tie-up on the
MOCN (multi-operator core network) which allows for spectrum pooling.
¨ Scope for more savings. 30-40% of its existing leased sites
are due for renewals over the next 2-3 years. XL had renewed certain lease
contracts at lower lease rates. The savings in tower leasing fees will reduce
infrastructure expenses, which dropped 6% YoY in 1H16.
¨ Forecast revision. We lower FY16F-17F revenue by
6.3%/10.5% on the back of weaker revenue momentum and management’s
lowered guidance for FY16 (“challenging” vs “in line or better than market”
previously). Our EBITDA forecasts have also been reduced by 6.3%/4.5% for the
respective years. The weak execution of its traditional channels (60% of
channel sales) is still a key earnings risk. We expect a stronger core earnings
recovery in 2H16 from interest savings post the repayment of debt with proceeds
from the sale of towers and its rights issue earlier.
¨
Valuation. We roll over our DCF valuation base
to FY17. Our revised TP of IDR4,000 translates into 5.2x/4.4x FY17/18 EV/EBITDA
which we believe factors in mid-terms risks from its transformation
initiatives. XL remains a key sector laggard with re-rating catalysts coming
from stronger-than-expected EBITDA margins, lower-than-expected capex and the
improvement in revenue momentum.
Best regards,
David Arie Hartono
Assistant Vice President
Research Analyst – Media, Transportation, Telco
PT. RHB Securities Indonesia
