XL is optimistic of sustained traction in its prepaid ARPU and subscriber expansion. This is underpinned by: (i) minimal churn from high-quality customers, (ii) personalized marketing powered by artificial intelligence (AI) on XL’s app, and (iii) ongoing implementation of AI-guided dynamic pricing in selected regions. We maintain our forecasts, TP of RM3.00 and OUTPERFORM call.

We came away from XL AXIATA’s 2QFY24 results briefing feeling largely optimistic of its earnings and competitive outlook in 2HFY24.

The key takeaways are as follows:

1. XL maintained its FY24 guidance of: (i) revenue growth at high digits (1HFY24: +8.2%, FY23: +11%), (ii) EBITDA margin of around 50% (1HFY24: 53.6%), FY23: 50%) and (iii) capex of around IDR8t (1HFY24: IDR4.9t, FY23: IDR8.8t). However, this guidance does not take into account the financial impact from the upcoming migration of Link Net’s residential subscribers to XL. To recap, this exercise is aligned with transformation of Link Net into FiberCo, and is currently pending regulatory approvals.
    
2. Moving forward, XL is optimistic of continued traction in its prepaid ARPU and subscriber expansion. To recap, in 2QFY24, prepaid net adds surged sequentially to 868k (1QFY24: 141k), while ARPU expanded to IDR91k (1QFY24: IDR87k). The spike in net adds was attributed to improvements in network quality by XL in regions where it previously had a low market share. Looking ahead, XL expects its prepaid base to remain resilient due to minimal churn, driven by the group’s ongoing efforts to attract high-quality customers.
    
3. Prepaid ARPU is expected to remain due to effective and personalized marketing powered by artificial intelligence (AI) on XL’s app. Existing users that downloaded the digital app saw a 15%-20% increase in ARPU. As at 2QFY24, own-app users have reached 32.1m after expanding by 5.1m users YoY.
    
4. Moreover, prepaid ARPU is expected to receive a boost from XL’s ongoing implementation of AI-guided dynamic pricing in selected regions. This involves reducing “benefits” or data quotas for users in geographical areas where demand is elastic, network utilization is high, and XL has achieved its targeted market share.
    
5. XL expects seasonally higher costs in 2HFY24 on the back of lumpy costs for: (i) annual regulatory fees for spectrum renewal, (ii) execution of certain enterprise projects, and (iii) year-end marketing campaigns. On the other hand, XL expects FY24 effective tax rate to normalize to its guidance of 20% after it spiked to 23% in 1HFY24. This was given one-off adjustments following the finalization of XL’s tax reporting in 2QFY24.
    
6. XL is cautious on weak macroeconomic indicators in 2HFY24, which may allude to growing financial pressure on the middle class. This may undermine XL’s ability to raise prices, as affordability concerns increase, alongside rising prices for food staples.
    
7. XL observed minimal market disruption and competition following the launch of Telkomsel Lite in February, which is an affordable internet starter pack. On the other hand, XL is more concerned about growing competition from small unlicensed internet service providers (ISP) across Indonesia. These ISPs resell internet services purchased from other licensed providers to the public in local neighbourhoods or municipalities via illegal outdoor Wi-Fi access points or LAN cables. Nevertheless, XL and other licensed ISPs are engaged in discussions with the Ministry of Communication and Information Technology (Kominfo) to improve the enforcement of existing regulations. They are also exploring ways to effectively monitor, detect violations and determine legal consequences for perpetrators.

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) a strong USD may weigh on the performance of its digital telcos at frontier markets (e.g. Robi Bangladesh, Dialog Sri Lanka, Smart Cambodia), (ii) gestational earnings and cash flow drag from Link Net’s aggressive expans ion, and (iii) capex up-cycle from looming implementation of 5G in Indonesia.

Source: Kenanga Research - 8 Aug 2024