This article first appeared in The Edge Financial Daily on November 5, 2019
Axiata Group Bhd
(Nov 4, RM4.30)
Maintain outperform with an unchanged target price (TP) of RM4.80: XL Axiata’s cumulative nine months of financial year 2019 (9MFY19) normalised earnings were within our expectations. The group continued to gain market traction from its dual-brand strategy and upselling of data-driven products. The ex-Java region also offers potential to tap a larger customer base. We maintain our “outperform” call for Axiata Group Bhd and sum-of-the-parts-driven TP of RM4.80.
XL Axiata’s (66.36% wholly owned) 9MFY19 normalised net profit of 505 million rupiah (RM149,539) was within our expectations but above the consensus, making up 77% and 91% of respective full-year estimates. Year-on-year, its 9MFY19 revenue of 18.7 trillion rupiah (+11%) was backed by stronger service revenue (+16%). Blended average revenue per unit stood solid at 34,000 rupiah (9MFY18: 30,000 rupiah). Total subscribers grew by 3% to 55.5 million, thanks to increasing market share with consumers outside Java with a higher smartphone penetration rate of 86% (9MFY19: 78%).
Quarter-on-quarter, third quarter (3Q) of FY19 revenue rose by 3% with service revenue improving by 4%. Although XL’s total subscriber base was lower by 1.1 million, this was mainly due to higher competition in the low-value prepaid segment and did not reflect meaningfully in the group’s top line. A normalised net profit of 214 million rupiah (-4%) was registered for 3QFY19 with the decline attributed to higher taxes (36.5%; +4.5 percentage points) for the period.
Updates on XL’s base station footprint puts the total at 129,000 sites of which 30% are feeding fourth-generation network coverage. The management is also emphasising continual investment in transmission, back-hauls and upgrades. We believe such efforts would provide the greater speed and customer experience needed to fuel the group’s upselling strategies and drive demand for data offerings.
Post XL’s result announcement, we tweak our FY19 and FY20 earnings estimates higher by 2.3% and 0.5% respectively after incorporating the results.
Our TP implies 5.6 times estimated FY20 enterprise value/earnings before interest, taxes, depreciation and amortisation, -1.5 standard deviation below the stock’s three-year average. Sentiment on Axiata’s stock remains clouded following the cancellation of a merger with Telenor. However, we see a tactical opportunity as the group is in the spotlight surrounding talk of smaller-size deals. Even if this does not come to pass, we opine that its growing regional foothold and cost savings-driven initiatives beyond FY19 could be a safe bet for investors post FY18 impairments and adjustments.
Risks to our call include: i) weaker-than-expected recovery at Celcom and XL; ii) poorer-than-expected cost management; and iii) slower-than-expected growth from edotco. — Kenanga Research, Nov 4