XL Axiata
Margins set to beat expectations
Event
§ Following a review of our estimates and discussions with management, we
are upgrading our EXCL target price to Rp7,200 (from Rp5,700), increasing
FY10E-FY12E EPS by 4-7% due to higher margin estimates given EXCL’s
profitability should be maintained in 3Q driven by easing competition whilst
EBITDA margins should trend close to 50% long term. We have also lowered
the risk free rate to 9% from 10%. We re-iterate our Outperform call and
highlight EXCL as our top pick in the sector.
Impact
§ Rational competition supporting better margins. We expect EXCL will
maintain margins achieved in 1H10 for the full year, increasing our FY10
estimate to 51.6% driven by competition remaining rational. This is further
supported by our view that Indosat (ISAT IJ, Neutral, Rp5,500, TP: Rp4,700)
has shifted its focus to a more sustained recovery.
§ Risk free rate lowered to 9%. We have lowered the risk free rate assumption
to 9% from 10% following the continued risk compression within the
Indonesian market driven by political stability and structural reform. We have
also rolled forward to valuation to FY11.
§ EXCL has secured another 5MHz of 3G spectrum. XL has received
approval from the Minister of Communication and Information for a second 3G
carrier of 5MHz, adjacent to its existing 3G spectrum, bringing XL's total 3G
spectrum allocation to 10MHz, in line with 3G allocations for Telkomsel
(unrated) and Indosat.
Earnings and target price revision
§ We are increasing FY10E-FY12E EPS by 4-7% due to higher margins, and
we are increasing our target price by 26% to Rp7,200 (from Rp5,700) and
have rolled forward our valuation to end of FY11.
Price catalyst
§ 12-month price target: Rp7,200 based on a DCF methodology.
§ Catalyst: 3Q results in October.
Action and recommendation
§ EXCL remains our top pick in the sector. EXCL is currently trading at 11.2x
FY11 PER, which represents a 24% discount to the Indonesian Telecom
sector, a 20% discount to the market and regional peers, despite EXCL
providing an above market 3 year EPS CAGR of 58%. Our target multiple of
15.5x FY11 PER is in line with our target multiple for PT Telkom (TLKM IJ,
Rp9,550, Outperform, TP: Rp10,100) of 15x.
§ Our FY10 EPS estimate remains 15% above consensus, driven both by
higher revenue and margin assumptions and we therefore continue to expect
another leg of consensus upgrades will follow the 3Q results.
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