XL Axiata (EXCL-BUY-IDR5,300-TP:IDR6,400) - Bahana

Transformer
Best managed telco operator; In a de-leveraging phase
In a highly competitive telco industry, XL Axiata (EXCL) has managed to continuously transform itself and emerge as the most successful cellular operator (exhibit 11&12). Testimony to this is was EXCL’s market penetration which expanded from 18% in 2007 to 23% in 2010 coupled with EBITDA margin expansion from 42% to 53% over the same period, allowing net gearing to fall from 198% to 84% (exhibit 13). The company’s initiatives, including pricing strategies and marketing promotions are almost always replicated by its peers. On the SIM card distribution, EXCL successfully implemented the cluster system, which is currently being developed by TSEL.

Data segment: Long-term growth catalyst
As voice & sms revenue growth will be limited ahead, the management believes data migration will be the next growth catalyst for EXCL. With more sophisticated client base and booming user-friendly and cheaper smart phones and tablets (exhibit 22&23), the industry’s future growth will stem from the data segment (exhibit 19&20). Additionally, as 51% of EXCL’s subscriber base utilizes data, this represents a huge potential for growth in the coming years. Hence, going forward, EXCL will still has to invest further on this data segment given that the company’s 3G BTS coverage only covers roughly 80% of the population, versus voice coverage of around 95%.

2Q11 results: Transition to data segment-based revenue in progress
EXCL’s focus on migration to data has resulted in weaker than expected 2Q11 net revenue, which increased just 2% q-q and 9% y-y with voice revenue continuing to fall -1% q-q and -8% y-y and SMS revenue beginning to decrease -2% q-q, although still up 14% y-y. On a more positive note, data revenue increased significantly 45% y-y and 13% q-q (exhibit 25). Going forward, we believe that data revenue will grow at the expense of voice and partially SMS revenues. Thus, in the short term, EXCL is undergoing a transitional phase as its revenues from data are still insignificant, requiring more spending on data infrastructure, resulting in increased depreciation.

Highest growth in the sector; ReInitiating with BUY
In 2H11, we expect higher earnings contribution to stem from Lebaran and year-end festivities, although recent development on data trend as discussed above could mean lower EXCL growth in 2011 compared to levels in the past. Over the longer term, however, we continue to believe that EXCL’s growth rate will be higher than its peers on the back of the company’s aggressive and innovative growth strategy, particularly on data. We believe EXCL will maintain its EBITDA margin around 52% (exhibit 14). We expect EXCL’s revenue to reach IDR19.0t, up 9% y-y and 13% y-y bottom line growth to IDR3.3t. Using our blended 2012 valuation of DCF, industry P/E and EV/EBITDA, we arrive at IDR6,400 TP for EXCL. Thus, as we see 21% upside potential on EXCL and given recent market underperformance (exhibit 5), we re-initiate EXCL with a BUY.