Date of Report: September 17, 2024
Broker Name: UOB Kay Hian

Overview of XL Axiata

XL Axiata (Bloomberg ticker: EXCL IJ) is a telecommunications service provider in Indonesia, primarily engaged in offering cellular and mobile internet services. The company is listed with a market capitalization of IDR 29.8 trillion (USD 1.97 billion), and as of the report date, its share price was IDR 2,320, with a target price of IDR 2,900, indicating a potential upside of 25%.

Key Financial Data

• Market Cap: IDR 29.8 trillion (USD 1.97 billion)
• Price Performance:
  • 1-month: 6.4%
  • 3-month: 6.4%
  • Year-to-date: 16.0%
• 52-week High/Low: IDR 2,650 / IDR 1,885

Acquisition of ServeCo to Drive Growth

• Revenue Impact: XL Axiata announced plans to acquire ServeCo, the business-to-consumer (B2C) segment of Linknet (LINK), and lease LINK’s fiber network. If the acquisition is finalized, it could potentially increase XL Axiata’s revenue by 2% in 2024 and 8% in 2025.
• EBITDA Impact: ServeCo’s EBITDA margin is expected to be similar to LINK’s 48% margin as of 6M24, which could increase XL Axiata’s EBITDA by 2% in 2024 and 7% in 2025.
• Valuation Impact: Post-acquisition, XL Axiata’s 2025 EV/EBITDA is projected to decrease slightly to 3.8x from 4.2x in 2024, making the valuation slightly more attractive.

Earnings Outlook for 2025

• Net Profit Growth: XL Axiata is expected to post a 10% year-on-year net profit growth in 2025. Several factors contribute to this, including:
  • Strengthened fixed broadband (FBB) penetration
  • The company becoming a leading convergence operator in Indonesia
  • Enhanced network efficiency due to collaboration between its FBB and mobile services.

Fixed Broadband Market Opportunity

The fixed broadband (FBB) market in Indonesia remains underpenetrated compared to other Southeast Asian countries, offering significant growth potential. XL Axiata sees this as a critical business opportunity to enhance its offerings in the convergence services market.

Financial Metrics

• 2023 Financial Performance:
  • Revenue: IDR 29.1 trillion
  • EBITDA: IDR 14.2 trillion
  • Operating Profit: IDR 3.7 trillion
  • Net Profit: IDR 1.1 trillion
• 2024 Financial Projections:
  • Revenue: IDR 32.3 trillion
  • EBITDA: IDR 15.9 trillion
  • Operating Profit: IDR 4.4 trillion
  • Net Profit: IDR 1.3 trillion
• 2025 Financial Projections:
  • Revenue: IDR 34.6 trillion
  • EBITDA: IDR 17.2 trillion
  • Operating Profit: IDR 5.3 trillion
  • Net Profit: IDR 1.9 trillion

Risks

• Downside Risks:
  • Increased competition in the telecommunications market
  • Worsening macroeconomic conditions in Indonesia
  • Higher-than-expected costs, including spectrum and interest expenses
  • Potential unfavorable regulatory changes.

Valuation & Recommendation

• UOB Kay Hian maintains a BUY rating for XL Axiata with a target price of IDR 2,900.
• The target price implies an EV/EBITDA of 4.6x (near -0.5 standard deviation to its 10-year average), applied to the average of 2024 and 2025 EBITDA.
• XL Axiata currently trades at an EV/EBITDA of 4.2x for 2024 and 4.0x for 2025, near -1 standard deviation (3.9x).