XL AXIATA (XL)'s 9MFY24 results tracked our expectation but disappointed consensus. Core net profit surged on increased topline (due to enlarged subscriber base and higher data revenue) coupled with lower opex. Looking ahead, XL's aggressive push into converged services following Link Net's transfer of home passes could lead to sustained revenue traction. We maintain our forecasts, TP of RM2.75 and OUTPERFORM call.

Within our expectation. XL's 9MFY24 core net profit of IDR1.31t (+30% YoY) tracked our expectations at 79% of our full-year forecast, but missed consensus at 69% of the full-year estimate. This set of results will likely enable AXIATA group, which will report its results on 28 Nov, to maintain its full-year guidance (revenue growth: mid single-digit, EBIT growth: mid-teens).

Driven by topline growth and lower opex, though ARPUs edged down slightly QoQ. 9MFY24 topline expansion (+6% YoY) was mainly driven by subscriber growth and higher data & digital revenue (+8% YoY) - aligning with XL's full-year guidance of mid-to-high single-digit growth.

Reduction in 9MFY24 opex led to stronger EBITDA margin of 52.4% (9MFY23: 50.2%), in line with XL's FY24 guidance of above 50%. This was primarily driven by lower sales & marketing costs due to better cost controls and deployment of AI in XL's operations.

Topline growth coupled with lower overheads drove a 30% YoY expansion in 9MFY24 core net profit. This was despite drag from: (i) lower associate contribution (likely due to Link Net's 3-fold QoQ expanded losses given its ongoing delayering strategy), (ii) higher depreciation, and (iii) increased tax expenses.

In 3QFY24, XL's subscriber base expanded across the board, though slight QoQ ARPU compression led to lower blended ARPU of IDR43k (2QFY24: IDR44k).

Key takeaways from XL's analyst briefing are as follows:

Leading the market with price hikes. XL attributed its prepaid sequential ARPU compression to: (i) aggressive pricing by competitors (particularly Telkomsel), (ii) macroeconomic headwinds impacting costs of living, and (iii) illegal Wi-Fi offloading. On the bright side, despite implementing a price increase in early September, XL did not face significant customer backlash or market resistance. Despite XL's price hikes, Telkomsel remains aggressive on its pricing strategy since February, following the introduction of Telkomsel Lite, which is an affordable internet starter pack. This had led to increased dual SIM usage among customers, further eroding XL's data revenue.

Unabating ARPU headwinds. Additionally, XL's data revenue (-6% QoQ) was impacted by the ongoing proliferation of illegal WiFi networks, operated by unlicensed small internet service providers (ISP) across Indonesia. These ISPs resell internet services purchased from licensed providers (including XL), distributing access within local communities via unauthorized outdoor Wi-Fi access points or LAN cables. This has negatively affected both XL's mobile and fixed broadband ARPUs. In light of these challenges, XL has turned cautious on its ARPU outlook, contingent on a potential easing of aggressive pricing strategies by its competitors.

Optimistic of growth in home broadband. In late September, XL completed the migration of 750k subscribers from First Media and the transfer of 3m home passes. This brings its total fixed broadband subscriber base to over 1m, with a network of more than 6m homes passed. Looking ahead, XL does not rule out the possibility that home broadband penetration rates could reach 30%-35% as seen in some regional markets. This implies potential subscriber base expansion to 1.8m-2.1m customers based on its current network.

Nevertheless, this growth would likely unfold over a longer timeline of up to 3 years due to the lag between network deployment and subscriber take-up.

To recap, in Dec 2023, XL and Link Net underwent a structural transformation which entailed: (i) transfer of Link Net's residential subscribers, 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.

Forecasts. Maintained.

Valuations. We also maintain our Sum-of-Parts TP of RM2.74 (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 its digital businesses and Edotco.

Maintain OUTPERFORM.

Risks to our call include: (i) potential earnings setback from Smart Fren at Indonesia given its looming acquisition, (ii) gestational earnings and cash flow drag from Link Net's aggressive fiber home pass expansion, and (iii) capex up-cycle from looming implementation of 5G at Indonesia.

Source: Kenanga Research - 8 Nov 2024