This article first appeared in The Edge Financial Daily on August 5, 2019

Axiata Group Bhd
(Aug 2, RM5)
Maintain underperform with a higher target price of RM4.55: XL Axiata’s six months of 2019 (6MFY19) normalised net profit of 291 billion rupiah (RM85 million) was above both our and consensus expectations, making up 74% and 60% of respective full-year estimates.

While 6MFY19 gross revenue met our expectations, better cost efficiencies and dual brand strategies led to the positive earnings deviation.

Year-on-year, first half of financial year ended June 30, 2019 (1HFY19) revenue increased to 12.3 trillion rupiah (+11%), propelled by better service revenue (+15%).

The positive traction was yielded by higher blended average revenue per user of 34,000 rupiah (from 1HFY18: 31,000 rupiah) from data monetisation and upselling of its customer base.

Total subscribers also increased by 7% to 56.6 million, which could be driven by larger market share captured outside Java and higher smartphone penetration of 86% (from 1HFY18: 84%).

In terms of earnings before interest, taxes, depreciation and amortisation (Ebitda), a 19% growth and margin expansion to 38.7% (+2.7 percentage points [ppts]) was mainly thanks to lower interconnection charges despite the higher top line, coupled with lower marketing expenses.

Overall, normalised net profit for 1HFY19 registered at 291 billion rupiah (from 1HFY18: normalised losses of 49 billion rupiah).

Quarter-on-quarter, second quarter FY19 (2QFY19) revenue improved by 5% to 6.3 trillion rupiah, supported by a 1.5 million stronger subscriber base. Ebitda also expanded by 8%, as efficient management of infrastructure expenses led Ebitda margin to record at 39.3% (+1.2ppts). Consequently, 2QFY19 normalised net profit closed at 222 million rupiah (around 200%). Keeping the momentum going.

XL Axiata appears to be seeing returns from its investments in expanding its ex-Java presence. This should be supported by the group’s network upgrades for continual growth in network capabilities and coverage.

As of 1HFY19, XL Axiata manages nearly 128,000 base transceiver stations, nearly doubling its 66,400 footprint in 1HFY16.

This could further fuel Axiata Group Bhd’s ability to stay with its strategy to upsell to its customers and monetise data offerings.

With this, management has kept its FY19 guidance unchanged; perform better than or at least in line with market, achieve high 30’s Ebitda margin, and cash-out capital expenditure of 7.5 trillion rupiah.

Post-XL Axiata results, we raise our FY19/FY20 earnings by 3.3%/4.2%, mainly to incorporate the leaner cost environment of XL operations to Axiata Group. We believe the rise in share price could have been overdone, also evidenced by the stock’s price retracement since the said report by 3.8% versus the FBM KLCI’s 3% from the same period. — Kenanga Research, Aug 2