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Minggu, 05 Juni 2011

XL Axiata: Buy; Rp5,850; TP Rp7,100; EXCL IJ Attractive valuations for proven execution - DBS Vickers

• Industry recovery may be underway after No. 1 player Telkomsel stopped offering huge dealer commissions and major players raised peak hour tariffs in March.
• The stock has shed 15% since reporting 1Q11 result and is attractive at 13x FY11F PER versus Telkom’s 12.3x, for its FY10-12F EPS CAGR of 20% versus Telkom’s 7%.
• Upgrade to BUY with DCF-based Rp7,100 TP (WACC 12%, terminal 3%) for potential returns of 25%.

Incumbent reduced dealer commissions in 1Q11, easing competition. Our checks indicate that Telkomsel offered huge dealer commissions to push its new starter packs. This was also reflected in the sharp rise in marketing costs in 1Q11 at Telkom (+ 74% YoY versus -15% for XL and -20% for Indosat). Both XL and Telkom have indicated that competition had eased considerably in March, which we attribute to lower dealer commissions by Telkomsel. Since Telkomsel has captured ~100% of new industry subscribers in 1Q11, we think, it may not need aggressive measures to meet its target of capturing ~ 50% of new industry subscribers in FY11F.

Major operators raised peak hour tariffs in late 1Q11. In March, Telkomsel raised peak hour tariffs on its Rp0/min promotion across 9 different geographies. Indosat doubled its peak hour tariffs on its Rp24/min promotion, while XL raised peak hour tariffs by c.10% for its Rp0/min promotion.

Limited downside even under the worst-case scenario. Our base case scenario is 8% industry revenue growth in 2011. Our worst-case scenario, assuming another quarter of promotions, suggests 6% industry growth and 15% earnings growth for XL supported by declining interest costs. This implies 14x FY11F PER at the current price, a reasonable valuation for double-digit growth, even under the worst-case scenario

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