XL AXIATA (XL)’s 1QFY24 results met our expectation but outperformed consensus’. Earnings tripled YoY as data demand surged, which led to higher blended ARPU. Subscriber base remained resilient QoQ despite price hikes due to inelastic demand. We maintain our forecasts, TP of RM3.00 and OUTPERFORM call.

Within our expectation. XL’s 1QFY24 core net profit of IDR552b (>3x YoY) tracked our expectations at 28% of our full-year forecast, but exceeded consensus at 35% of the full-year estimate.

YoY earnings tripled as data demand surged. 1QFY24 topline expansion of 12% YoY was largely driven by strong growth in data and digital revenue (+13% YoY) which led to higher blended ARPU of IDR44k (1QFY23: IDR40k). Bottomline more than tripled YoY as EBITDA margin surged to 54% (1QFY23: 49%) following a dip in infrastructure costs. To a lesser extent, earnings were also boosted by lower sales and marketing expenses due to improved sales channel mix.

Encouraging sequential subscriber trends. 1QFY24 subscriber base expanded by 0.3% QoQ as postpaid customers remained largely sticky whilst prepaid users inched up to 56m (4QFY23: 55.9m). This was in spite of sustained price hikes for XL’s mobile plans – thus implying inelastic demand. In addition, there was sustained momentum in customer convergence as penetration in 1QFY24 improved to 79% (4QFY23: 75%). This implies that 252k connected homes have mobile subscriptions under the XL Satu plan

Link Net’s losses more than halved QoQ. In spite of a slight contraction in topline (-8% QoQ), sequential losses at 20% associate Link Net more than halved to IDR110b (1QFY23: IDR259b) To recap, in Dec 2023, XL and Link Net underwent a structural transformation which entailed: (i) upcoming transfer of Link Net’s 750k residential subscribers to XL, and (ii) roll-out of an additional 2m new home passes by Link Net for XL. This is aligned with the group’s delayering strategy where XL becomes a ServeCo and Link Net transforms to a FiberCo. As ServeCo, XL will offer fixed-mobile converged offerings, whilst Link Net as FiberCo will focus on delivering 8m home passes to XL by 2026 (2023: 3.4m).

The key takeaways from its results briefing are as follows:

1. XL maintained its FY24 guidance of: (i) revenue growth at high digits (FY23: +11%), (ii) EBITDA margin of around 50% (FY23: 50%), and (iii) capex of around IDR8t (FY23: IDR8.8t).

2. In spite of the surge in data traffic (YoY: +18%, QoQ: +3%), network utilization rate remains stable at c.50%-60%. This was underpinned by XL’s sustained efforts to upgrade its sites and add new base transceiver stations (YoY: +10%, QoQ: +2%),

3. The auction for 5G spectrum (700MHz and 26GHz bands) at Indonesia will likely open in 2HCY24. To recap, in March, XL activated 5G in four cities in Central Java Province via a partnership with Nokia.

Forecasts. Maintained.

Valuations. We also maintain our Sum-of-Parts TP of RM3.00 (refer below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We continue to like AXIATA for: (i) its plans to deleverage and strengthen its balance sheet, (ii) growth prospects for digital telcos and tower assets at emerging markets, and (iii) strong asset monetization prospects for Edotco and its digital businesses. Maintain OUTPERFORM.

Risks to our call include: (i) strong USD weighing on the performance of its digital telcos at frontier markets (e.g. Robi Bangladesh, Dialog Sri Lanka, Smart Cambodia), (ii) gestational earnings and cashflow drag from Link Net’s aggressive expansion, and (iii) capex up- cycle from looming implementation of 5G at Indonesia.

Source: Kenanga Research - 30 Apr 2024