XL earnings decline due to higher costs

  • XL net profit plunges 97% quarter-on-quarter
  • Analysts still expect re-merger of Axiata with TM


XL earnings decline due to higher costs


MALAYSIAN telco Axiata Group’s Indonesian unit PT XL Axiata (XL) posted lower Q1 2018 earnings on the back of higher year-on-year revenue, due to higher depreciation and amortisation, higher operating expenses and lower tax benefits.

For the first quarter of this year, XL recorded revenue of IR5,501 billion, a 4.5% increase from the previous year and a normalised net profit of IR11 billion, down 47% year-on-year.

Quarter-on-quarter however, revenue declined by 8% due to service revenue decreasing by 10% due to seasonal weakness and impact from the regulatory reform of prepaid SIM registration. Net profit meanwhile, plunged by 97% compared to the previous quarter, due to lower sales, higher depreciation and amortisation and lower tax benefits.

The rise in revenue was attributed to a 29% increase in data revenue, according to local research house PublicInvest Research. It noted that data revenue accounted for 77% of service revenue for XL compared to only 63% during the same period last year.

“2018 started with a challenging market dynamic and regulatory changes in the prepaid segment in the form of prepaid Sim registration,” it said in a report on May 15.

It said that although this had resulted in negative short-term impact in terms of revenue loss for unregistered SIMs, the industry is expected to benefit from a healthier market environment in the long run. The final deadline for prepaid SIM registration was April 30, 2018, it added.

Sequentially, postpaid ARPU [average revenue per user] has been on a declining trend but the impact was offset by the larger increase in postpaid subscriber growth, PublicInvest said.

Higher costs impact earnings

As for the lower normalised net profit, PublicInvest noted that depreciation and amortisation jumped 10% due to wider network roll-out while sales and marketing expenses increased 110% due to the implementation of prepaid SIM registration. Tax benefits meanwhile, declined by 27%.

PublicInvest also stated that at EBITDA (earnings before interest, tax, depreciation and amortisation) level, the results were slightly below its expectation.

“However, we maintain our earnings forecasts as we expect prepaid SIM registration would lead to healthier industry growth in 2H18,” it said, reiterating its neutral rating on Axiata.

Analysts remain optimistic towards Axiata

PublicInvest also believes that the market will remain volatile in the short term due to the victory of Pakatan Harapan in the recent elections.

“Although we believe it will be business as usual for the telco sector, stock prices will remain choppy, in our view. Any sharp correction in Axiata’s share price is seen as a good buying opportunity.”

AmInvestment Bank in a research note on May 15, maintained its buy call on Axiata, stating that while XL’s revenue growth continues to be underpinned by its dual-brand transformation programme under XL and Axis, its sustainability may be constrained by rising competitive pressures over the longer term, while faster growing ex-Java revenues deliver lower EBITDA margins.

“We continue to be bullish on Axiata’s prospects on a value-enhancing re-merger with TM, which will continue the re-rating process to bridge the valuation gap with Singtel.”

It noted also that Axiata currently trades at a bargain FY18 forecast *EV/EBITDA of 6 times, which is way below its two-year average of 8.1 times and half of SingTel’s 14 times. (*EV refers to enterprise value.)


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