Axiata XL’s subscriber growth supports improving earnings

Prepaid subscribers rose by a million, while its postpaid users saw a smaller increase of 10,000 subscribers


AXIATA Group Bhd’s Indonesian subsidiary’s, PT XL Axiata Tbk, earnings are expected to improve this year on continued subscriber growth for its prepaid segment.

The mobile network operator’s prepaid subscribers rose by a million subscribers quarter-on-quarter (QoQ) to 56.74 million in the fourth quarter of 2020 (4Q20), while its postpaid users saw a smaller increase of 10,000 subscribers.

AmInvestment Bank Bhd (AmInvest) maintained its ‘Buy’ call on Axiata with an unchanged sum-of- parts (SOP)-based fair value of RM4.50 per share.

Its analyst Alex Goh said pricing competition amid weak consumer spending power due to the pandemic caused XL’s 4Q20 data revenue to slide 4% QoQ to 5.4 trillion rupiah (RM1.6 billion), slightly dampening its data service revenue in 4Q20.

Axiata’s earnings forecasts for the financial year 2020 (FY20F) until FY22F have been lowered by 3%-4%, mainly from XL’s higher one-off depreciation adjustments for FY20.

This stems from XL’s normalised profit of RM197 million in FY20 coming in below AmInvest’s expectations at 8% and 65% of consensus.

“The weak results are mainly from a one-off International Financial Reporting Standards (IFRS) 16 lease accounting adjustments which drove up depreciation charges by 69% year-on-year (YoY) to RM3.6 billion and net interest charges by 20% YoY to RM638 million.

“However, XL’s pre-IFRS normalised net profit of RM247 million was 15% above our forecast, but 56% below consensus. Hence, at the operating level, XL’s FY20 normalised Ebitda of RM3.8 billion was instead in line with our and market’s expectation,” Goh said in a note yesterday.

XL’s 4Q20 Ebitda fell by 7% QoQ to RM928 million due to a 4% QoQ drop-in service revenue as average revenue per user for its prepaid segment declined. This was partly offset by subscribers increasing by one million to 57.9 million overall for both its prepaid and postpaid segments during the quarter.

The higher depreciation charges and interest costs from IFRS 16 adoption caused XL’s 4QFY20 normalised net profit to halve QoQ to RM48 million.

Amid the merger plans between PT Indosat Tbk and PT Hutchison 3 Indonesia, AmInvest expects XL’s FY21F revenue to trend in line with the market’s low single-digit growth expectations with Ebitda margins in the low end of 50%, similar to 50% in FY20.

However, XL’s FY21F capital expenditure is expected to be lower at RM2.03 billion from RM2.26 billion last year, which should be easily funded internally as the US$296 million (RM1.19 billion) sales of 2,782 towers have partly cut net debt/Ebitda to 0.5 times from 1.1 times in 4Q19.

“The group’s 4Q20 tower footprint still increased by 2,380 sites or 2% QoQ to 144,978 sites mainly for 2G and 4G amid the pandemic.

“With XL accounting for 8% of Axiata’s SOP, we view the group as a regional operator with excellent prospects of monetising its multiple businesses. The stock currently trades at a bargain FY21F enterprise value/Ebitda of four times versus Maxis Bhd’s 13 times,” Goh added.

Hong Leong Investment Bank Bhd analyst Tan J Young in a separate note said the research house maintained its forecast pending analyst briefing in conjunction with Axiata’s 4Q20 results announcement slated on Feb 25.

“Axiata remains a ‘Hold’ on the back of unchanged SOP-derived target price of RM3.76. We like its regional exposures with focus on emerging countries, which may deliver great growth potential.

“However, regulatory, especially in Nepal, and execution risks are major concerns. With the mega-merger called off, other potential corporate exercises that may unlock values include in-country consolidation, tower asset and digital businesses listings,” Tan said.