XL AXIATA Oversold quality name BUY - BNPP

CHANGE
Lower earnings forecast; revised TP: IDR6,600
We lower our EBITDA forecast for 2011-13 by 2.5-6.2%. XL’s three-year EBITDA CAGR is now 6.4% (previous: 8.7%). We have also factored in an increase in capex from IDR5t to IDR6t pa in 2011-13, in line with management’s latest guidance. As a result, our DCF-based TP is reduced by 9.0% to IDR6,600, offering 30.7% upside potential.

CATALYST
Lower Voice & SMS revenues but data growth is strong Voice and SMS revenues in 1H11 were below expectations. Key reasons: 1) loss of market share in the low-end prepaid segment, 2) shift in spending towards data, and 3) market maturity. For capex, XL will accelerate the roll-out of its data network coverage and upgrade the
backhaul due to stronger-than-expected growth in the data business.

VALUATION
Trading at lower-end of historical EV/EBITDA trading band XL trades at 5.0x 2012E EV/EBITDA, which is a 5.8% premium to Indosat and a 6.1% discount to Telkom. Valuation is now at the lower-end of its 18-month trading band. Besides attractive valuation, we forecast dividend yield will rise from 2.1% in 2010 to 5.1% in 2013E. Downside risks are intense price competition and short-term cost pressures.

KEY CHART
XL's EV/EBITDA trading band

Key Earnings Drivers & Sensitivity
§ XL's earnings are sensitive to changes in tariffs for its voice and SMS business, which, combined, still constitute 62% of its total revenues for 2012E
§ Increase in competition and deterioration in economic conditions may slow revenue growth for data, which is the main growth driver for XL.

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Lower EBITDA on slower Voice & SMS revenue growth
We have lowered our EBITDA forecast for XL by 2.5% in 2011, 5.7% in 2012 and 6.2% in 2013. This was after factoring in:
a) Steeper 5.0% y-y decline (previous: -3.1% y-y) in Voice revenue to IDR8.04t this year. Our revised
Voice revenue forecasts for 2011, 2012 and 2013 is now 2.0%, 2.6% and 2.3% lower, respectively, than our previous forecast.
b) Slower 12.9% y-y growth (previous: +16.1% y-y) in SMS revenue to IDR3.93t in 2011. Our revised SMS revenue forecast for 2011, 2012 and 2013 is now 2.8%, 5.6% and 5.2% lower, respectively, than our previous forecast.
c) Higher +43.8% y-y growth (previous: +36.8% y-y) in Data & VAS revenues to IDR3.35t in 2011. Our revised Data & VAS revenue forecast for 2011, 2012 and 2013 is now 5.1%, 6.9% and 4.8% higher, respectively, than our previous forecast.
d) Lower EBITDA margin of 51.1% in 2011 (previous: 52.0%), 50.5% in 2012 (previous: 52.9%) and 50.9% in 2013 (previous: 53.5%).

The revision in Voice and SMS revenues follows the company’s weaker-than-expected performance in 1H11, which was impacted by: 1) lost of market share in the low-end prepaid segment, 2) shift in spending towards data, and 3) market maturity. Nevertheless, we expect XL to register stronger growth in Voice and SMS revenues in 2H11 due to higher usage during the festive season and less intense market competition since March-April 2011.
Our lower EBITDA margin forecast is due to higher opex related to the data business, some of which are incurred ahead of the generation of data revenues. For example, XL saw an increase in Value-AddedServices (VAS) cost in 1H11 as it launched various VAS programmes. Also, as XL accelerates the roll-out of its data network, it will have to incur higher rental, installation and utilities costs for new BTS.
Nevertheless, we remain optimistic that XL’s EBITDA margin will remain healthy at above 50% over the next three years. We also stress that the higher opex is to support the strong growth in the data business and is not the same as a situation where there is limited revenue growth potential and margin pressure.
Overall, we forecast XL’s EBITDA will deliver a three-year CAGR of 6.4% (previous: 8.7%), which now ranks it behind Indosat (ISAT IJ, BUY) (three-year CAGR: +7.3%) but ahead of Telkom Indonesia (TLKM IJ, BUY) (three-year CAGR: +4.4%).

Higher capex to accelerate data network roll-out
During its 2Q11 results conference call, management raised its 2011 capex guidance from IDR5t to IDR6t.
This is due to acceleration in the roll-out of its data network coverage and upgrade of its transmission/backhaul network to support the stronger-than-expected growth in the data business.
Thereafter, we have assumed that capex remains steady at IDR6t pa in 2012-13E.

While we sense an urgency to chase after data revenue opportunities, we believe XL’s management remains cognisant of the returns on its investments. In addition, we believe XL could also achieve additional capex savings in the next 12-24 months by entering into network sharing initiatives with industry players, particularly with regards to building out the transmission/backhaul network.

Revised TP of IDR6,600 offers 30.7% upside potential
On the back of our earnings and capex revisions, we have reduced our DCF-based TP by 9.0% to IDR6,600,which offers 30.7% upside potential. For our DCF calculation, we use a WACC of 10.9% (cost of equity: 14.4%, after-tax cost of debt: 6.0%) and a terminal growth rate of 3.0%. Our revised TP implies a fair 2012 EV/EBITDA of 6.3x.