XL AXIATA (XL)’s 1HFY24 results met our expectation but surpassed consensus’. Topline expanded on the back of an enlarged subscriber base and higher traffic volumes. Coupled with commendable opex controls, earnings soared in spite of drag from higher depreciation, interest costs and taxes. We maintain our forecasts, TP of RM3.00 and OUTPERFORM call.

Tracked our expectation. XL’s 1HFY24 core net profit of IDR1.05t (+68% YoY) tracked our expectations at 55% of our full-year forecast, but exceeded consensus at 57% of the full-year estimate.

Propelled by data and excellent cost management. Its 1HFY24 revenue growth (+8% YoY) was primarily driven by solid expansion in data and digital revenue (+10% YoY) as traffic leapt by 13% YoY. Lower opex, coupled with topline expansion led to the strong jump in 1HFY24 EBITDA (+17% YoY) and core net profit (+68% YoY).

The decline in 1HFY24 opex was mainly attributed to lower costs for infrastructure and sales & marketing. To a lesser extent, this was further boosted by the reduction in supplies and overhead expenses. The cost savings were generated by sustained measures to manage costs and extract efficiencies.

The lower overheads more than offset 1HFY24 profit drag emanating from: (i) higher depreciation, (ii) increased finance costs, (iii) spike in effective tax rate to 23% (1HFY23: 18%), and (iv) lower contribution from associates.

Spike in QoQ prepaid net adds amidst stable ARPU. 2QFY24 subscriber base expanded 2% QoQ on the back of a stable postpaid base, and as prepaid net adds spiked by 868k (1QFY24: 141k). Meanwhile, XL’s home broadband base achieved net adds of 15k to reach 267k subscribers, which implies 81% convergence penetration (1QFY24: 79%). Blended ARPU remained stable sequentially at IDR44k, pausing its consecutive QoQ expansion since 2QFY23.

Link Net’s QoQ losses widen. In spite of Link Net’s 2QFY24 revenue growth (+8% QoQ), its LAT widened QoQ to IDR173b (1QFY24: IDR110b loss). We attribute this to the sustained expansion of home passes for XL, which corresponds to heightened depreciation and financing costs for the group.

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 4).

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 - 7 Aug 2024