XL Axiata; Wait for better entry point ; Hold (downgrade from Buy); Rp6,750; TP Rp7,100 prev Rp7,200; EXCL IJ - DBS Vickers

Healthy margins offset lower revenue growth. Group revenue growth of 9% YoY came in below our expectations of 11% due to sharp drop in voice revenue. However, EBITDA margins of 52% (51% in 1Q10) stood slightly above our expectations due to lower marketing and sales costs. We project 13% group revenue growth and 52.3% EBITDA margins for FY11F. We believe the downside risks in revenue growth should be offset by upside potential for EBITDA margins if marketing expenses could be kept under control.

Sharp voice revenue decline. Voice revenue declined 9% QoQ offset to some extent by non-voice (data plus SMS) revenue growth of 2%. Overall, cellular revenue declined 4% QoQ as subscriber base & blended ARPU declined 2% & 4% respectively. We believe that XL is well placed to grow its data revenue as it offers maximum number of data plans catering to various user segments. In 4Q10, XL launched a new portal XLGO with data access experience as good as real smart-phone users.

Downgrade to HOLD on valuation grounds. Stock is up 30% year to date. While we continue to like XL in the longer term, we are downgrading to HOLD due to limited upside potential in the near term. Axiata is a cheaper proxy with over 16% upside potential.