Results Review:
XL Axiata (EXCL IJ, BUY, TP: IDR3,832)
Data Leadership To Drive Growth
XL Axiata (EXCL IJ, BUY, TP: IDR3,832)
Data Leadership To Drive Growth
We believe that the sharp 38% share price pullback over the past
three months has priced in concerns about XL’s commercial execution. On the
plus side, we expect financing costs to trend lower with the elimination of USD
debt. We anticipate pressure on service revenue to dissipate over the medium
term, on improved data monetisation efforts, noting the steep erosion in legacy
revenues from faster data migration. BUY maintained with a revised TP of
IDR3,832 (from IDR4,000, 67% upside). Our Preferred Telco remains
Telekomunikasi Indonesia (TLKM IJ, BUY, TP: IDR5,000).
♦
Network supremacy. We expect the rollout of 3G on the
900MHz band to cement XL Axiata’s (XL) data leadership in Indonesia, and
contribute towards longer-term ARPU accretion on the back of improved data
monetisation efforts. XL continues to exhibit the strongest growth in data
traffic (9M16: +102% YoY vs 80-90% at its peers), given its 4G first mover
advantage and data-centric investments. The flip side is that it is also
experiencing accelerated erosion in legacy revenues, which continue to crimp
its service revenue.
♦
Trade channel issues. Stiff competition within
traditional channels has compelled XL to lift dealer commissions, which we
believe contributed to the positive sequential growth in 3Q16 service revenue –
this follows two consecutive quarters of contraction. Management said more work
is required to boost productivity of traditional dealers, citing the still-low
volume sales. Some 30-40% of sales are currently undertaken via modern
channels.
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3Q16 earnings: slightly below expectations
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Source:
Company data, RHB
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♦
BUY maintained. We lower our FY16/17 core earnings
forecasts by 4-7% while raising our cost of debt assumption to 9% from 8% (WACC
of 11.2% vs 9.6% previously). This in turn has lowered our DCF-based TP to
IDR3,832. Our BUY call on the stock is unchanged, on valuation grounds.
♦
Downside limited. XL’s share price has been
battered by concerns over execution challenges related to its business
transformation. On the other hand, the elimination of USD debt over the last 12
months has returned its balance sheet to pre-Axis levels (3Q16 net debt/EBITDA of
1.4x vs >3x in FY15). We believe downside risk is limited with the stock
trading at inexpensive FY17F EV/EBITDA of under 5x (low end of historical
trading band). Key risks to our rating include stronger-than-expected
competition, higher-than-expected capex, and protracted execution issues.
Kindly click the following link for the full report: XL Axiata : Data Leadership To Drive Growth
Best regards,
Jeffrey Tan
Regional Head of
Telecoms
RHB Research Malaysia
