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Minggu, 05 Juni 2011

XL Axiata (EXCL IJ), disciplined value creator, initiating coverage, BUY, TP Rp7,600 - CLSA

CLSA Indonesia Head of Research Dee Senaratne initiates Xl Axiata (EXCL IJ) coverage with a BUY call and TP of Rp7,600 (30% upside). Despite being the late entrant, EXCL has grown sustainably and taken share in a tough market. We expect the company to continue to win incremental market share.

Easy money has been made but the stock but we expect over the next few years EXCL will be a strong FCF generator. We are expecting 8% FCF yield this year, going up to 13% in 2014.

Unencumbered by a capital intensive/low return fixed-line the company was able to gain market share by offering cheaper prices whilst at the same time being very cost efficient. On the cost issue, when I visited the office recently, I saw that the company switched off the electricity during lunch time. Nice to see.

As a pure-play mobile operator, EXCL has generated a 5-year 42% revenue Cagr by building scale. We expect EXCL to focus on data and it will allow EXCL to grow above the industry growth rate. Due to its superior cost control and capital efficiency it is able to generate superior returns on capital than its peers. ROE and ROIC of 32% and 30% respectively is best in class.

Key points from the report:
· Superior opex/capex = best in class ROE.
· EXCL generates ~3x more revenue per employee then TLKM or ISAT.
· Our forecasts are 15% above consensus but EXCL continues to positively surprise the market.
· The rapid de-gearing of the balance sheet from peak gearing of 400% in 2008 to 42% by FY11, going to negative 9% in 2013CL.
· We would also note that Excel generates nearly 3x more revenue per employee than TLKM or ISAT.
· Valuation: Currently trading on 12x 11CL PE Excel is at a discount to regional and Indonesian telecom peers despite 48% earnings growth and 30% ROE
· Recent MSCI inclusion (only 25 of the 424 Indonesian public companies) affirms Excel’s blue-chip status and ensures it will be a core component of any ETF creation.

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