Axiata’s future outlook may see slow growth

KUCHING: Axiata Group Bhd (Axiata) may potentially see moderating growth ahead as its 67 per cent Indonesian subsidiary PT XL Axiata Tbk (XL) has posted results below consensus expectations for the fourth quarter of financial year 2012 (4QFY12).

XL, a telecommunications company (telco) listed on the Indonesia Stock Exchange, posted FY12 core net profit of 2,878 billion rupiah representing 87 per cent of consensus full-year estimates and a 9.1 per cent decline year-on-year (y-o-y).

The key variances were lower-than-expected tower revenue (down four per cent y-o-y) and higher-than-expected tower lease expenses (up 35 per cent y-o-y), said Lim Tee Yang, a research analyst with RHB Research Institute Sdn Bhd (RHB Research).

“Fourth quarter revenue surprisingly dropped 7.2 per cent quarter-on-quarter (q-o-q), due to poorer figures across the board. The biggest q-o-q drop was seen in SMS (down 9.7 per cent) as management had tweaked pricing to be closer to competition but SMS usage increased by just 1.5 per cent.

“Tower revenue (down 19.6 per cent q-o-q) was hit by debt collection issues with an operator and the termination of the domestic roaming agreement with Axis in August,” Lim stated.

On a quarterly basis, earnings before interest, tax, depreciation and amortisation (EBITDA) margin dropped 0.3 percentage point to 44.3 per cent mainly due to higher staff costs (up more than 100 per cent) due to bonus provision.

Meanwhile, 3.41 million subscribers were gained back in the 4Q as XL’s prepaid subscriber base recovered to 45.4 million as management shifted focus on regaining subscriber market share.

Cheow Ming Liang from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) noted that XL’s total operating expenses had increased by 26 per cent y-o-y to 11.2 trillion rupiah in FY12 due to higher infrastructure expenses of 5.2 trillion rupiah (up 35 per cent y-o-y) caused by the increase in rental sites, towers and leased lines expenses as a result of a higher base stations rollout and higher 3G infrastructures.

“XL is expecting its targeted FY13 revenue to be within or above its peers’ expected growth of about 10 per cent.

“Meanwhile, the group is targeting to record a low 40’s per cent EBITDA margin in FY13 as a result of higher data contribution and the impact of the interconnection rate,” Cheow stated.

Meanwhile, Lim said that on its 2013 guidance, the management expects revenue to grow in line or better than industry levels.

“Management expects capital expenditure to remain elevated at eight to nine trillion rupiah (FY12: 10 trillion rupiah) as XL aims to continue expanding 3G coverage while aiming to provide the best data experience at existing 3G sites.

“Following XL’s disappointing 4Q results, we have reduced Axiata’s FY12 to FY14 earnings by two to four per cent after lowering margin assumptions

“While capex for XL remains elevated in anticipation of demand for data by management, data revenue growth does not appear encouraging for now.

“Hence, earnings growth for XL remains challenging and therefore, growth for Axiata will likely moderate in 2013, in our view,” Lim said.

The analyst also noted risks to the forecast, including “weaker-than-expected performance by Celcom as well as from regional cellular companies due to, among others, macroeconomic factors (inflation) and over-priced acquisitions”.

As such, the analyst cut Axiata’s sum-of-parts fair value to RM6.50 per share (from RM7.15 per share previously) following a cut in XL’s fair value to 6,000 rupiah from 7,200 rupiah.

Meanwhile, Cheow lowered Kenanga Research’s FY12, FY13 and FY14 forecasts for Axiata’s net profit by 0.8 per cent, 2.4 per cent and 2.9 per cent, respectively.

He lowered Axiata’s target price by three sen to RM6.78, based on an unchanged targeted FY13 enterprise value to forward EBITDA of 8.3 times.

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