paula ruth ([email protected]) avg. 5 day ma trading ...€¦ · porter’s five competitive...

SECTOR FOCUS PT Trimegah Securities Tbk - www.trimegah.com 1

XL Axiata Company Focus

Paula Ruth

([email protected])

Sebastian Tobing

([email protected]

Better subscriber mix support higher ARPU momentum

EXCL managed to rise substantially its ARPU (25%YoY) in 1H15 despite

its number of subscribers declined by 27%YoY as the company’s chang-

es its focus to higher ARPU subscribers compared to lower ARPU sub-

scribers (higher churn rate; more sensitive to price changes). Moreover,

we saw a QoQ positive growth (4%) in effective data price for the 1st

time after several quarters of QoQ decline, supported by currently

healthier competition among telco industry players.

Strong demand for data service

We believe EXCL’s cellular business will benefit from strong data de-

mand in Indonesia on the back of higher smartphone adoption and

switch of subscribers’ preference to data service from telco legacy ser-

vice (voice and SMS). We expect growth in data to drive cellular reve-

nue growth in the future (2015E/16E 3/10%YoY). Accounting the impact

of lower tower revenue (due to tower sales to SUPR last Dec) to consoli-

dated revenue, we still estimate a soft decline (-2%YoY) this year con-

tinue with +7%YoY growth next year for EXCL’s revenue.

Promising sign of QoQ EBITDA recovery

Although 1H15 EBITDA declined 9%YoY, the company was able to

achieve positive QoQ EBITDA growth of 7% in 2Q15. We think the

EBITDA recovery was also possible because of Axis’ break-even achieve-

ment on EBITDA (prev. negative) and favorable result from EXCL’s effort

in transforming its strategy. We noticed the EBITDA recovery is yet

sufficient to maintain EXCL’s market share (among Big 3 operators) in

terms of EBITDA (1H15 ~14%; FY13/14 ~16/15%) though. We still

expect the company’s EBITDA to decrease in 2015E (-4%YoY), but

recover to 9%YoY growth in 2016E.

Valuation: Neutral with DCF-based TP of Rp2,600

Our target price implied 7% upside. For 2016E/17E, EXCL is trading

5.7/5.5x EV to EBITDA, higher than ISAT (2.8/2.8x), but below TLKM

(7.6/7.0x). The company still trades below regional peers’ average

(excl. Indonesia) of 2016E/17E EV to EBITDA of 9.4/9.0x.

PT XL Axiata Tbk provides a wide range

of mobile telecommunications services in

Indonesia.

Share Price Rp2,440

Sector Telecommunications

Price Target Rp2,600 (7%)

Year end Dec 2013 2014 2015F 2016F 2017F

Sales 21,265 23,460 22,973 24,494 24,737

EBITDA 8,659 8,623 8,249 8,975 9,216

Net Profit 1,033 -804 -662 519 554

EPS 121 -94 -78 61 65

Core Profit 1,942 148 -35 227 224

Core EPS (Rp) 227 17 -4 27 26

Core EPS Growth (%) -34.8% -92.4% nm nm -1.4%

DPS (Rp) 65 5 0 7 7

BVPS (Rp) 1,792 1,645 1,569 1,622 1,680

EV/EBITDA (x) 5.9 5.9 6.2 5.7 5.5

Core P/E (x) 11 141 nm 92 93

Div Yield (%) 2.7% 0.2% 0.0% 0.3% 0.3%

Neutral Rp2,600

Reuters Code EXCL.JK

Bloomberg Code EXCL.IJ

Issued Shares 8,541

Mkt Cap. (Rpbn) 20,841

Avg. Value Daily 6 Month (Rpbn)

13.3

52-Wk range 6750 / 2340

Axiata Investments (Indonesia)

Sdn. Bhd.

66.4%

Public 33.6%

Core EPS 16F 17F

Consensus (Rp) 92 166

TRIM vs Cons. (%) -72% -84%

Road to Recovery

Company Update

Stock Data

Major Shareholders

Consensus

Stock Price

Companies Data

September 15, 2015

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(Rpbn)Avg. 5 Day MA Trading Value (RHS) Price (LHS)

PT Trimegah Securities Tbk - www.trimegah.com SECTOR FOCUS 2

Healthier competition among Telco players

Currently, there are ~5 telco operators in the industry, down from previously ~10 players in 2009, implying that

the industry has entered consolidation phase from previously unhealthy price war during 2008-12. Hence, we

think there will be less price war in the industry supporting the industry player’s effort to achieve better moneti-

zation of their network (more likely to increase ARPU).

Figure 2. Current marketing positioning of GSM operators

Source: TRIM Research

Telkomsel Indosat XL Three

Postpaid brand (high end customers) Halo Matrix XL Tri

Quality brand (medium to high end customers) Simpati Mentari XL Tri

Fighting brand (low to medium end customers) As IM3 Axis Tri

Figure 1. Timeline of Indonesia’s telco industry’s competitive phases



Figure 3. Porter’s five competitive forces analysis


Substitution to data service

There are three main services that telco operators provide: Voice, SMS, and Data. As smartphone adoption

(~14% in 2013) keep increasing, we think there is higher risk of substitution to data service rather than voice

and SMS service. Hence, operators might tend to increase voice and SMS price to balance the decline in voice

and SMS traffic.


Growing usage of data service from increasing smartphone penetration

As mobile subscribers’ penetration rate in Indonesia already reached 125%, we think there won’t be a significant

increase in the total number of subscribers in the industry. However, we think there’s still potential upside of fur-

ther growth for the cellular business from the growing data usage on the back of growing smartphone adoption

in Indonesia. This is also implied from 3G penetration rate in Indonesia which was still at 45%, significantly be-

low the mobile subscribers’ penetration rate, considering that most of mobile subscribers in Indonesia still use

feature phone (only 2G; voice and SMS). It is expected that smartphone penetration in Indonesia to reach 38%

in 2017E from 14% in 2013.

Source: World Bank, ITU, TRIM Research

Figure 4. Mobile Subscribers Penetration in ASEAN, China, and India (2013)

Figure 5. A snapshot of mobile subscribes and usage in Indonesia

Source: Internet live stats, Internet world stats, www.techinasia.com, companies’ data, TRIM Research


Figure 7. Social network users in Indonesia(in millions)

Source: statista.com, World Bank, TRIM Research

Figure 8. Number of Internet Users in Indonesia

Source: Euromonitor, World Bank, TRIM Research Source: statista.com

Figure 9. Average mobile app download rate per capita

in selected countries as of 3Q14

Figure 6. Indonesia’s smartphone penetration

Source: Statista.com, TRIM Research

Figure 10. Spectrum allocation

Source: Indosat, Telkom, XL, and TRIM Research

Total 850 Mhz 900 Mhz 1800 Mhz 2100 Mhz 2300 Mhz

Telkomsel 65.0 5.0 7.5 22.5 15.0 15.0

Indosat 57.5 2.5 10.0 20.0 10.0 15.0

XL Axiata 45.0 - 7.5 22.5 15.0 -

Hutchison Three 20.0 - - 10.0 10.0 -

Spectrum allocation—resource for competitiveness

For 3G service on 2100 Mhz spectrum, EXCL has bandwidth as much as Telkomsel’s and still more than Indosat’s

and Three’s. As 900Mhz already set as technology neutral, ISAT also allocated its 10Mhz bandwidth on that band

for 3G and 2G service. In total EXCL owned 45Mhz of bandwidth, still lower than Telkomsel and Indosat, but sub-

stantially higher than Three.


Commercial LTE service on 1,800Mhz

EXCL’s spectrum (22.5Mhz) on 1,800Mhz is as much as Telkomsel and higher than Indosat and Three. This was

achieved by acquiring Axis last year (Axis owned 15Mhz of bandwidth on 1800Mhz spectrum). Before the acqui-

sition EXCL only had 7.5Mhz on 1,800 band. Although 1800Mhz band should be ready for LTE after refarmed

(scheduled to finish on November 2015), higher usage of 4G service will depend also on the readiness of the

ecosystem (4G smartphone penetration rate). We think there will be substantial increase in LTE penetration if

the LTE mobile phone price goes down to Rp500K (~USD35) considering that telco operators do not subsidize

handset (99% of subscribers using prepaid packages). There’s already LTE mobile phone priced at Rp1.1mn

(~USD77) based on price survey last May.

Source: Indonesia’s Ministry of Communication and Informatics

Before Refarming

After Refarming

Figure 11. Refarming on 1800 Mhz spectrum


Management’s Strategy

Figure 13. Revenue breakdown Figure 14. Cellular revenue breakdown

Voice

36%

SMS

21%

Data25%

VAS

4%

Others

1% Inteconne

ct13%

Source: Company, TRIM Research Source: Company, TRIM Research

Source: Company, TRIM Research

More sustainable business strategy—higher ARPU

Starting this year, a new strategy was being deployed by the company by focusing to be a more sustainable and

profitable business. The company expects the transformation process (named “3R - Revamp, Rise, Reinvent”) to

take 12-18 months. The 1H15 initiatives (“Revamp” phase), including more focus on quality subscribers, gave

positive impact to substantially higher 1H15 ARPU to Rp30K (+25%YoY) despite losing significant number sub-

scribers (-27%YoY), which according to the company are low-revenue subscribers. We expect similar trend of

declining number of subscribers until end of this year (-25%YoY), which then continue to positive growth in the

future (3/2% in 2016E/17E).

Figure 12. EXCL’s subscribers and implied ARPU growth

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Figure 15. QoQ data traffic and rate changes

Data consumption drive cellular business future growth

Voice and SMS still accounts most (FY14 ~57%) of EXCL’s cellular revenue. However, as data usage continues to

rise supported by growth of smartphones users, we expect more subscribers to use and prefer data services

(FY14 ~25% of cellular revenue) compared to SMS and voice in the future. During 2Q15, EXCL was able to im-

prove its effective data pricing (Rp/kb) slightly by 4%QoQ. The company actually already increased its headline

data pricing for several of its product offerings last Dec, but it was yet translated to better effective data price as

data traffic kept going up implying high appetite of data consumption. We think the effective data price QoQ in-

crease was also contributed from the company’s effort to improve its subscriber mix (focus more to high ARPU

subscriber), managing data abuser, and added with positive seasonality impact of 2-week Ramadhan effect in

July during 1H15. Note that 2Q15 data traffic was slightly down by –2%QoQ though. We expect data revenue to

grow by 15/25%YoY in 2015E/16E (vs. FY13/14 16/42%; 1H15 14%YoY vs. 1H14 43%YoY) based on rising data

usage and relatively slower decline of effective data pricing.

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2G BTS 3G BTS 4G BTS

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Figure 16. EXCL’s Total BTS Figure 17. BTS composition


Slower voice and SMS growth—migration to data

EXCL’s voice traffic (outgoing minutes) started to post negative growth (-13%YoY) in FY14 (vs. FY12/13 +15/

+1%YoY) with further decline in 1Q15/2Q15 by-8%/-4%QoQ. However, FY14 voice revenue still slightly grew

(+3%YoY) as voice price (Rp/minute) was up by 19%YoY (vs. FY12/13 –9%/-8%.). We estimate growth in

2015E/16E voice revenue to be 1/3%YoY (vs. FY12/13/14 at +6/-7/+3%YoY) relying mostly on rising voice

price. As we expect higher adoption of smartphone (higher usage of mobile messaging service), we predict

2015E/16E SMS traffic to go down by -28/-15%YoY (1H15 –28%YoY vs. 1H14 +6%YoY; FY13/14 +6/-2%). We

expect the company to increase SMS price (Rp/sms) in 2015E/16E by 17/15%YoY (1H15 19%YoY vs. 1H14 –1%

YoY) to partially offset the falling SMS traffic. Thus, we think there will be negative growth in SMS revenue

(2015E/16E -15/-3%YoY vs. FY14 +3%YoY; 1H15 –14%YoY vs. 1H14 +5%YoY).

For total cellular revenue, we estimate growth of 3/10%YoY in 2015E/16E (vs. FY13/14 –1/+13%YoY; 1H15

+1%YoY vs. 1H14 +14%YoY) primarily driven by data revenue increase. We expect 2016E data’s contribution to

cellular revenue to be ~33% (up from FY14 ~25%), while contribution from voice and SMS to be ~35% (FY14

36%) and ~16% (FY14 21%) respectively, implying substitution to data service by the cellular subscribers.


Figure 18. Voice traffic and rate

Figure 20. Cellular revenue


Figure 21. Cellular revenue composition



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Figure 19. SMS traffic and rate


Figure 22. EXCL’s forecast drivers

Source: Companies and TRIM Research

31 December 2013A 2014A 2015E 2016E 2017E 2018E 2019E

XL Axiata

Mobile subs (m) 61 60 45 46 47 48 50

Subscriber market share 21.3% 19.0% 14.1% 14.3% 14.4% 14.5% 14.8%

Implied Net ARPU (Rp 000) 31 31 35 43 42 42 43

% change -11.0% -1.6% 15.0% 22.1% -1.8% 1.0% 1.2%

Voice

Outgoing MOU (min/sub/month) 169 130 122 131 130 132 134

Total MOU (min/sub/month) 338 260 246 263 265 272 277

Total minutes carried (b min) 216 188 154 144 147 153 159

% change 1.3% -13.0% -17.7% -6.5% 2.0% 4.0% 4.0%

Incoming minutes (%) 50% 50% 50% 50% 50% 50% 50%

Voice revenue / outgoing minute (Rp) 72 85 105 116 117 118 119

% change -8.7% 18.7% 23.6% 10.3% 1.0% 1.0% 1.0%

Data

Data traffic (terabyte) 54,615 123,824 181,228 239,278 275,170 302,687 326,902

% change 141.5% 126.7% 46.4% 32.0% 15.0% 10.0% 8.0%

Data Rate (Rp/kb) 0.07 0.04 0.03 0.03 0.03 0.03 0.03

% change -51.8% -37.6% -21.2% -5.1% -5.0% -3.0% -1.0%

SMS

Outgoing SMS (bn) 259 253 183 156 154 152 151

% change 5.9% -2.1% -27.5% -15.2% -1.0% -1.0% -1.0%

Revenue / outgoing SMS (Rp) 18 19 22 25 25 25 25

% change -9.2% 5.6% 17.1% 14.6% 0.5% 0.5% 0.5%

Gross revenue (Rp t) 21.4 23.6 23.1 24.6 24.8 25.6 26.7

% change 0.3% 10.4% -2.1% 6.6% 1.0% 3.2% 3.9%

Net revenue (Rp t) 21.3 23.5 23.0 24.5 24.7 25.5 26.5

% change 1.4% 10.3% -2.1% 6.6% 1.0% 3.2% 3.9%

EBITDA (Rp t) 8.7 8.6 8.2 9.0 9.2 9.6 10.0

% change -11.1% -0.4% -4.3% 8.8% 2.7% 3.9% 4.6%

EBITDA margin 40.7% 36.8% 35.9% 36.6% 37.3% 37.5% 37.8%

Capex / revenue 32.6% 24.5% 26.5% 22.0% 20.0% 18.0% 18.0%


Lower leased tower revenue (impact from tower sales to SUPR)

Last December, EXCL completed a sale and lease back transaction for its 3,500 tower with SUPR. This caused

EXCL’s 1H15 other telecommunication segment revenue significantly decreased (~35%YoY), which lead to EXCL’s

1H15 net revenue declined by -4%YoY (cellular revenue growth almost flat at 1%YoY). For 2015E/16E, we esti-

mate EXCL’s net revenue growth at a pace of –2/+7%YoY (vs. FY13/14 +1/+10%YoY). The company’s 1H15 rev-

enue accounts 48% of our FY target,


Figure 23. EXCL’s net revenue

Reducing inefficiency post-Axis integration

EXCL’s opex excluding depreciation and amortization (D&A) are mostly contributed from infrastructure (~35% of

FY14 revenue; ~56% of total Opex excl. D&A) and interconnection & telco service (~14% of FY14 revenue;

~23% of total Opex excl. D&A). Network expansion, tower sales to SUPR, and higher frequency cost from Axis

acquisition & integration contribute to rise in infrastructure expense (+15%YoY), but lower SMS interconnect cost

and service access payment to RIM mostly helped to decreased its interconnection and other direct expenses sig-

nificantly (-29%YoY). As of March 2015, Axis already turned break-even on EBITDA level, after previously posted

negative EBITDA when acquired by EXCL around March 2014. Number of Axis’ contract staffs stays with EXCL

also declined resulting to lower personnel expense (-9%YoY; ~5% to revenue). We estimate the increase of opex

excl. D&A in 2015E/16E at –1%YoY/+5%YoY with ratio to revenue at 64/63% respectively, assuming the compa-

ny will be able to increase efficiency from Axis’ infrastructure further, e.g. relocate old Axis’ site or decrease tow-

er leases to avoid duplicate sites .


Figure 24. Opex excl. D&A

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Others Supplies & overhead

Personnel Marketing & sales

Interconnection & telco service Infrastructure

Figure 25. Opex excl. D&A composition


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acquis ition

Towers ' sale-and-

lease-back to SUPR


Promising sign of EBITDA recovery

As 1H14 EBITDA (margin 37%) yet accounted for Axis’ acquisition (around end of 1Q14), the company posted

1H15 EBITDA decline (-9%YoY; margin 35%). However, 2Q15 EBITDA has showed promising sign of recovery

through positive growth of 7%QoQ (2Q14 –6%QoQ; 1Q14 2%QoQ vs. 1Q15 –18%QoQ) accompanied with rise in

EBITDA margin to 36% (2Q14 34%; 1Q14 40% vs. 1Q15 34%). We still project a decline in EBITDA this year (-

4%YoY vs. FY13/14 –11/+0.4%YoY), which then recover to positive growth next year (9%YoY) with 2015E/16E

EBITDA margin at 36/37% based on higher infrastructure efficiency. 1H15 EBITDA is 47% of our 2015E FY esti-

mate. Note that 4Q14 EBITDA margin of 39% including one-off impact from completion of Axis’ integration and

renegotiation of contracts. According to EXCL, if those one-off impacts were excluded, 4Q14 EBITDA margin was

~36%. We have not assumed additional tower sales in our forecast.

Figure 27. EBITDA and EBITDA margin


Figure 26. Quarterly Revenue, opex excl. D&A, and EBITDA


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Contribution from JV (“Elevania”) yet significant

EXCL has 50% ownership in JV (“XL Planet” established since 2013) to build e-commerce (“open marketplace”)

website named “Elevania” (launched Mar 2014). As of 1H15, the company recorded its investment in JV of

Rp216bn, only ~1% of EXCL’s market cap. Last year, the loss as share of result from JV reached ~Rp102bn. Ac-

cording to the company, the JV might book slightly higher loss this year compared to last year.

Possibility of lower USD debt exposure this year

EXCL plans to lower its borrowing and reduce USD exposure significantly in the next 3-6 months. Among the total

of ~USD1.6tr loan, the effort to reduce borrowing and USD exposure will be prioritized respectively on the un-

hedged external debt (~USD 652mn), hedged external debt (~USD 400mn), and then the loan from Axiata

(~USD 500mn). Currently, the company is exploring the possibility of refinancing (converting to IDR loan), pay-

ing back, and/or extending the maturity of the USD loan. For restructuring plan of Axiata loan, the company is

still on discussion with Axiata. The company’s 1H15 net debt to EBITDA was 2.9x, already down from 3.2x in

1H14. It had cash amount of Rp5.5tr in 1H15 (vs. 1H14 Rp2.5tr). EXCL recorded forex loss of Rp1.5tr last se-

mester (vs. 1H14 Rp516bn; FY14 Rp1.3tr). We haven’t accounted this potentially lower forex exposure to our

estimation. Our 2015E/16E net debt to EBITDA is at 3.6/3.1x.

Figure 28. Interest bearing debt breakdown as of 1H15

Source: Company

USD Loan

(USD

1.55bn)71%

IDR

Bank

Loan

29%


Figure 29. TRIM vs. Consensus Estimates

Source: Bloomberg, TRIM Research

TRIM versus Consensus

Our 2017E revenue and EBITDA is below consensus probably because we assume lower subscriber, lower ARPU

and/or slower impact from LTE 1800Mhz service relative to consensus. We are also slightly more conservative on

our 2017E EBITDA margin (37.3%) compared to consensus (38.0%). This might also happen because we have

not included the assumption of additional tower sales between 2015E-17E which could lower the revenue and

reduce the EBITDA margin estimates (due to additional cost to lease tower instead of previously using its own

tower). We use EV/EBITDA as basis for our valuation.

Our operating profit is below consensus as our D&A (2015E-17E ~32% to revenue) is higher than consensus by

5/9/11%, which might happen due to higher depreciation rate that we used relative to consensus. The capex as-

sumption that we used is in-line for 2015E, but lower in 2016E/17E compared to consensus by 20/28%. If EXCL

sells its tower, which we have not included in our forecast assumption, it could lower its depreciation expense.

We forecast the company will still booked core loss in 2015E compared to consensus’ estimate of core profit.

Meanwhile, our core profit in 2016E-17E is significantly lower than consensus. The difference might be related to

difference in forecast of interest expense, forex loss, share of profit (loss) from JV, and other income (expense).

Our net debt in 2015E/16E/17E are higher than consensus by 39/37/42% respectively. We have not included

the plan to issue Sukuk, nor the USD loan restructuring assumption in our forecast, especially the USD 900mn

loan which will due in 2017E (bullet repayment).

EXCL Rp bn 2015E 2016E 2017E

Revenue TRIM 22,973 24,494 24,737

Cons 23,193 24,628 26,558

% -0.9% -0.5% -6.9%

EBITDA TRIM 8,249 8,975 9,216

Cons 8,317 9,196 10,092

% -0.8% -2.4% -8.7%

Operating Profit TRIM 981 1,315 1,180

Cons 1,475 2,211 2,909

% -33.5% -40.5% -59.4%

Core Profit TRIM -35 227 224

Cons 130 797 1,414

% nm -71.5% -84.2%


YE Dec 31 (in Rp b) 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F

EBIT 1,180 1,263 1,634 1,853 2,938 2,977 3,139 3,257 3,328 3,429

Tax Rate 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

EBIT*(1-t) 885 947 1,226 1,390 2,204 2,233 2,354 2,443 2,496 2,572

+ D & A 8,036 8,315 8,385 8,652 8,034 8,299 8,566 8,845 9,135 9,345

- Capex (4,947) (4,597) (4,777) (4,976) (5,163) (5,306) (5,508) (5,695) (4,887) (5,009)

+ Decrease/(increase) in non

cash working capital 31 (422) (195) (163) (247) (213) (1,075) 79 83 70

FCFF 4,004 4,243 4,639 4,904 4,828 5,013 4,338 5,672 6,827 6,978

FCFF - Discounted 3,663 3,552 3,553 3,436 3,095 2,940 2,328 2,785 3,067 2,868

Value of cash-flows thro 2026 31,285

Terminal value- 4x EV/EBITDA 20,997 Risk-Free rate 8.4%

Equity market risk premium 5.0%

Enterprise value 52,282 Beta 0.652

Net Debt / (Cash) 30,090 Cost of equity 11.7%

Equity value 22,192 Post-tax cost of debt 8.3%

Value per share 2,599 Debt/Capital ratio 69.2%

9.3% WACC

Target price after rounding 2,600

Figure 30. DCF calculations


Source: Company, Bloomberg, TRIM Research

Figure 31. Forward historical EV/EBITDA

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Sep-1

5

Fw-EV/EBITDA Fw-EV/EBITDA avg Fw-EV/EBITDA + 1 STD

Fw-EV/EBITDA - 1 STD Fw-EV/EBITDA - 2 STD Fw-EV/EBITDA + 2 STD

6.5

7.5

5.4

4.3

8.6

5.6


Country Mobile Subs. Smartphone Ticker Company Name Mobile Service

Penetration* Penetration** Revenue

Contribution

Indonesia 125% 23% TLKM Telkom (Telekomunikasi Indonesia) ~74%***

ISAT Indosat 81%

EXCL XL AXIATA 94%

Singapore 156% 87% ST Singtel (Singapore Telecommunications) 43%

STH Starhub 52%

M1 M1 62%

Malaysia 145% 80% Axiata Axiata 85%

Digi Digi.com 90%

Maxis Maxis NA

T Telekom Malaysia NA

Philippines 105% 15% TEL Philippine Long Distance 65%

GLO Globe Telecom 79%

Thailand 140% 49% ADVANC AIS (Advance Info Services) 84%

DTAC Total Access Communication NA

Figure 33. Regional telco companies’ profile

Source: Bloomberg, World Bank, ITU, Nielsen.com, TRIM Research

*) As of 2013 **) Article dated Jan 2014 ***) Telkomsel's revenue compared to consolidated TLKM revenue

Ticker Name EV/EBITDA P/E

2016E 2017E 2016E 2017E

Indonesia

TLKM Telkom (Telekomunikasi Indonesia) 7.6 7.0 16.9 5.1

ISAT Indosat 2.8 2.8 16.8 11.8

EXCL XL AXIATA 5.7 5.5 nm 91.7

Singapore

ST Singtel (Singapore Telecommunications) 12.8 12.4 14.2 13.2

STH Starhub 8.9 8.7 16.8 16.6

M1 M1 8.5 8.3 14.1 14.0

Malaysia

Axiata Axiata 8.2 7.8 19.5 17.7

Digi Digi.com 12.9 12.4 20.7 19.7

Maxis Maxis 13.2 12.8 24.3 23.2

T Telekom Malaysia 7.4 7.2 24.8 23.0

Philippines

TEL Philippine Long Distance 7.9 7.4 15.0 14.3

GLO Globe Telecom 8.0 7.6 19.0 17.6

Thailand

ADVANC AIS (Advance Info Services) 9.5 9.0 15.8 14.9

DTAC Total Access Communication 5.7 5.2 17.8 15.2

Average All 8.5 8.1 nm 21.3

9.4 9.0 18.4 17.2 Average Excl. Indonesia

Figure 32. Regional comparison

Source: Bloomberg, TRIM Research


Valuation: Neutral with 7% upside to TP Rp2,600

We initiate EXCL with a Neutral on the back of: 1) Promising sign of QoQ EBITDA recovery as Axis already

turned break-even (EBITDA) and positive result of the company’s transformation strategy so far; 2) Benefit from

Indonesia’s strong demand for data consumption; 3) Healthier competition among industry players supporting

better effective service price (esp. data price).

Our DCF-based TP uses WACC of 9.3% and terminal value of 4x EV/EBITDA. This is lower than Indonesia’s telco

industry leader, Telkomsel (TLKM’s subsidiary), which we valued using terminal value’s EV/EBITDA of 9x consid-

ering that TLKM’s (~45%) market share is bigger than EXCL’s (~19%) and TLKM’s better balance sheet com-

pared to EXCL’s.

EXCL is trading at 5.7/5.5x of 2016E/17E EV to EBITDA. This is below TLKM which we think is justified consider-

ing Telkomsel’s market leader position and strong balance sheet (with lower IDR weakness risk) relative to EXCL

and also ISAT. However, the valuation is significantly higher than ISAT (2016E/17E consensus at 2.8/2.8x), de-

spite EXCL’s EBITDA market share (~14%) is lower than ISAT (~19%) among Big 3 operators. In terms of PE

valuation, EXCL trades at –31.5x 2016E PE and 40.1x 2017E PE vs. (2016E/17E PE for TLKM 17/15x and ISAT

17/12x).

Compared to regional peers, EXCL trades at a discount to average regional telco excl. Indonesia of 9.4/9.0x

2016E/17E EV to EBITDA. We estimate that EXCL still booked core loss next year and recover to positive in

2017E). However, its 17E PE is still significantly higher than average regional telco excl. Indonesia.

Risks

Foreign exchange risk

As telco operator is a capital intensive business and its capex, e.g. for network equipment, tends to be imported

with payment to vendor using USD, the company used USD loan to help to finance its capex. Meanwhile, most of

the company’s revenue is in IDR. IDR weakness to USD could cause higher forex loss, interest expense, and low-

er profit, and also higher principal payment for the USD loan leading to higher risk of liquidity. IDR weakness to

USD also cause increase in fund amount required to finance its capex and rise in operational cost. This might

lead to lower network upgrade, expansion, less maintenance, and/or less purchase of items and services, which

might cause the company provide service with quality not as high as before and lower its ability to compete.

Competition Risk

We think the telco industry in Indonesia is very competitive. If competitor lower its price substantially as its mar-

keting strategy to grab market share for some times, it might cause the company losing its price-sensitive sub-

scribers and follow to decrease its price as well to remain competitive. This could lead to price war causing the

industry cannot monetize its investment properly nor growing its business in a sustainable way.

Technology change risk

As technology kept evolving, if the company cannot or too slow to invest in new technology which the industry

already adopted, the company could lose its competitiveness, such as in form of declining ARPU.

Interest rate risk

The company is exposed to risk from interest rate changes for its interest bearing debt. If interest rate goes up,

it cause higher interest expense and lower bottom line.


Company Background

PT XL Axiata Tbk was founded in 1989 as a trading and general services company under the name of PT Gra-

hametropolitan Lestari. It then entered the telecommunications industry in 1996 as Indonesia’s first private

cellular mobile telephone company and went public in 2005.

As of today, 66.5% of XL’s shares are owned by Axiata through Axiata Investments (Indonesia) Sdn. Bhd. and

the remainder 33.5% by public.


Income Statement (Rpbn)

Year end Dec 2013 2014 2015F 2016F 2017F

Revenue 21,265 23,460 22,973 24,494 24,737

Revenue Growth (%) 1.4% 10.3% -2.1% 6.6% 1.0%

Gross Profit na na na na na

Opr. Profit 2,901 1,782 981 1,315 1,180

EBITDA 8,659 8,623 8,249 8,975 9,216

EBITDA Growth (%) -11.1% -0.4% -4.3% 8.8% 2.7%

Net Int Inc/(Exp) -339 -1,496 -994 -972 -881

Gain/(loss) Forex -1,037 -1,295 -1,512 0 0

Other Inc/(Exp) -149 5 528 440 440

Pre-tax Profit 1,375 -1,003 -997 782 739

Tax -342 200 335 -263 -185

Minority Int. 0 0 0 0 0

Extra. Items 0 0 0 0 0

Reported Net Profit 1,033 -804 -662 519 554

Core Net Profit 1,942 148 -35 227 224

Growth (%) -34.8% -92.4% nm nm -1.4%

Dividend per share 65 5 0 7 7

growth (%) -51.9% -92.6% nm nm -1.4%

Dividend payout

ratio

52% -5% 1% 12% 11%

Balance Sheet (Rpbn)

Year end Dec 2013 2014 2015F 2016F 2017F

Cash and equivalents 1,318 6,951 3,962 3,291 1,031

Other curr asset 4,526 6,358 5,285 5,981 6,098

Net fixed asset 30,928 35,207 33,824 31,378 28,200

Other asset 3,505 15,114 21,504 21,584 21,366

Total asset 40,278 63,631 64,576 62,233 56,696

ST debt 3,125 3,922 3,228 15,872 3,054

Other curr liab 4,806 11,477 9,178 9,629 9,777

LT debt 14,697 25,707 30,824 14,952 21,898

Other LT Liab 2,349 8,478 7,949 7,928 7,623

Minority interest 0 0 0 0 0

Total Liabilities 24,977 49,583 51,180 48,381 42,352

Shareholders Equity 15,300 14,048 13,396 13,852 14,344

Net debt / (cash) 16,504 22,677 30,090 27,533 23,921

Total cap employed 32,347 48,233 52,169 36,733 43,865

Net Working capital -2,087 -2,089 -3,159 -16,229 -5,702

Debt 17,822 29,628 34,052 30,824 24,952

Cash Flow (Rpbn)

Year end Dec 2013 2014 2015F 2016F 2017F

Net Profit 1,033 -804 -662 519 554

Depr / Amort 5,759 6,841 7,268 7,660 8,036

Chg in Working Cap -1,286 4,838 -1,225 -245 31

Others 1,662 -2,336 0 0 0

CF's from oprs 7,167 8,540 5,380 7,935 8,621

Capex -7,394 -7,095 -6,088 -5,389 -4,947

Others -587 -9,583 0 0 0

CF's from investing -7,981 -16,678 -6,088 -5,389 -4,947

Net change in debt 3,336 4,961 -2,242 -3,228 -5,872

Others -2,012 8,808 -41 10 -63

CF's from financing 1,324 13,769 -2,283 -3,218 -5,935

Net cash flow 509 5,632 -2,991 -673 -2,262

Cash at BoY 809 1,319 6,953 3,964 3,293

Cash at EoY 1,318 6,951 3,962 3,291 1,031

Free Cashflow -227 1,445 -707 2,546 3,674

Key Ratio Analysis

Year end Dec 2013 2014 2015F 2016F 2017F

Profitability

Gross Margin (%) NA NA NA NA NA

Opr Margin (%) 13.6% 7.6% 4.3% 5.4% 4.8%

EBITDA Margin (%) 40.7% 36.8% 35.9% 36.6% 37.3%

Core Net Margin (%) 9.1% 0.6% -0.2% 0.9% 0.9%

ROAE (%) 12.7% 1.0% -0.3% 1.7% 1.6%

ROAA (%) 5.1% 0.3% -0.1% 0.4% 0.4%

Stability Current ratio (x) 0.5 0.6 0.8 0.7 0.6

Net Debt to Equity (x) 1.1 1.6 2.2 2.0 1.7

Net Debt to EBITDA (x) 1.9 2.6 3.6 3.1 2.6

Interest Coverage (x) 2.8 1.0 0.6 0.8 0.9

Efficiency A/P (days) NA NA NA NA NA

A/R (days) 23 18 17 19 18

Inventory (days) NA NA NA NA NA

Interim Result (Rpbn)

2Q14 3Q14 4Q14 1Q15 2Q15

Sales 6,034 5,994 5,919 5,481 5,610

Gross Profit NA NA NA NA NA

EBITDA 2,062 2,061 2,300 1,877 2,000

Opr. Profit 402 103 633 86 218

Net profit -824 -456 98 -758 -93

Core profit 18 -155 201 -67 -141

Gross Margins (%) NA NA NA NA NA

EBITDA Margins (%) 34.2% 34.4% 38.9% 34.2% 35.6%

Opr Margins (%) 6.7% 1.7% 10.7% 1.6% 3.9%

Net Margins (%) 6.7% 1.7% 10.7% 1.6% 3.9%

Core Margins (%) 0.3% -2.6% 3.4% -1.2% -2.5%

Capital History

Date

29-Sep-05 IPO@Rp2,000

PT Trimegah Securities Tbk

Gedung Artha Graha 18th Floor

Jl. Jend. Sudirman Kav. 52-53

Jakarta 12190, Indonesia

t. +62-21 2924 9088

f. +62-21 2924 9150

www.trimegah.com

DISCLAIMER

This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information

purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has

been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities.

While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication,

Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is

provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance

on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoever for any direct or

consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted

upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in

future participate in an offering of the company’s equity securities.

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