RHB Indonesia Morning Cuppa - 25 August 2016- (XL Axiata, Economic stimulus)

Good morning,

XL Axiata: 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% upside) 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. (David Hartono)

Link to report: XL Axiata : A Weak Channel

Link to Daily report: Indonesia Morning Cuppa - 250816

Strategy:

The Thirteen Stimulus Package: The Cheap Housing

On its latest stimulus release, the government has announced that it will cut out unnecessary processes involved in building low-cost housing as part of the 13th stimulus package. Similar with previous stimulus program which mainly directed to streamline business process, the government is also cutting the permit to only 11 from the previous 33 permits that the developer will need to secure to build affordable housing for low income earners. As such, with the reduction in permits there will be two main benefits: 1. 70% reduction of the cost, and 2. Shorten the progress from 981 days to only 44 days.

Moreover, the policy package also addresses to bundle several permits including the land certificate, proof of payment of land and building tax, and statement of non-dispute on the land. The government will release a regulation within the next 10 days to form the legal basis of the policy.

We believe this new stimulus will benefit companies which has direct exposure to low-cost housing such as Arwana (ARNA IJ– BUY – TP IDR690) and Bank Tabungan Negara (BBTN IJ – BUY – TP IDR2,420). To lesser extent, it can also support cement demand consumption over the longer term although we still expect overcapacity situation to linger in the near term. (Helmy Kristanto)

Media Highlights:

Economics

Food product export decreased due to weak demand

Corporates

Erajaya to expand to Singapore and Malaysia

Wijaya Karya aims IDR6.15trn from right issuance

Jasa Marga prepares cash to pay off debt

Medco Energy to conduct right issuance

Modern Industrial Estate optimist that it will reach the sales target

Vacancy rate of office building increased significantly

Our Recent Publication:

Company Initiation: Indonesia Pondasi Raya: King Of The Underground