XL Axiata Company Focus

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1 September 15, 215 XL Axiata Company Focus Paula Ruth Sebastian Tobing Road to Recovery Better subscriber mix support higher ARPU momentum EXCL managed to rise substantially its ARPU (25%YoY) in 1H15 despite its number of subscribers declined by 27%YoY as the company s changes its focus to higher ARPU subscribers compared to lower ARPU subscribers (higher churn rate; more sensitive to price changes). Moreover, we saw a QoQ positive growth (4%) in effective data price for the 1st time after several quarters of QoQ decline, supported by currently healthier competition among telco industry players. Strong demand for data service We believe EXCL s cellular business will benefit from strong data demand in Indonesia on the back of higher smartphone adoption and switch of subscribers preference to data service from telco legacy service (voice and SMS). We expect growth in data to drive cellular revenue growth in the future (215E/16E 3/1%YoY). Accounting the impact of lower tower revenue (due to tower sales to SUPR last Dec) to consolidated revenue, we still estimate a soft decline (-2%YoY) this year continue with +7%YoY growth next year for EXCL s revenue. PT XL Axiata Tbk provides a wide range of mobile telecommunications services in Indonesia. Neutral Company Update Share Price Sector Rp2,6 Rp2,44 Telecommunications Price Target Rp2,6 (7%) Promising sign of QoQ EBITDA recovery Although 1H15 EBITDA declined 9%YoY, the company was able to achieve positive QoQ EBITDA growth of 7% in 2Q15. We think the EBITDA recovery was also possible because of Axis break-even achievement on EBITDA (prev. negative) and favorable result from EXCL s effort in transforming its strategy. We noticed the EBITDA recovery is yet sufficient to maintain EXCL s market share (among Big 3 operators) in terms of EBITDA (1H15 ~14%; FY13/14 ~16/15%) though. We still expect the company s EBITDA to decrease in 215E (-4%YoY), but recover to 9%YoY growth in 216E. Valuation: Neutral with DCF-based TP of Rp2,6 Our target price implied 7% upside. For 216E/17E, EXCL is trading 5.7/5.5x EV to EBITDA, higher than ISAT (2.8/2.8x), but below TLKM (7.6/7.x). The company still trades below regional peers average (excl. Indonesia) of 216E/17E EV to EBITDA of 9.4/9.x. Companies Data Stock Data Reuters Code EXCL.JK Bloomberg Code EXCL.IJ Issued Shares 8,541 Mkt Cap. (Rpbn) 2,841 Avg. Value Daily 6 Month (Rpbn) Wk range 675 / 234 Major Shareholders Axiata Investments (Indonesia) 66.4% Sdn. Bhd. Public 33.6% Consensus Core EPS 16F 17F Consensus (Rp) TRIM vs Cons. (%) -72% -84% Year end Dec F 216F 217F Sales 21,265 23,46 22,973 24,494 24,737 EBITDA 8,659 8,623 8,249 8,975 9,216 Net Profit 1, EPS Core Profit 1, Core EPS (Rp) Core EPS Growth (%) -34.8% -92.4% nm nm -1.4% DPS (Rp) BVPS (Rp) 1,792 1,645 1,569 1,622 1,68 EV/EBITDA (x) Core P/E (x) nm Div Yield (%) 2.7%.2%.%.3%.3% Stock Price -. Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 PT Trimegah Securities Tbk - SECTOR FOCUS 1 8, 7, 6, 5, 4, 3, 2, 1, Avg. 5 Day MA Trading Value (RHS) Price (LHS) (Rpbn)

2 Healthier competition among Telco players Currently, there are ~5 telco operators in the industry, down from previously ~1 players in 29, implying that the industry has entered consolidation phase from previously unhealthy price war during Hence, we think there will be less price war in the industry supporting the industry player s effort to achieve better monetization of their network (more likely to increase ARPU). Figure 1. Timeline of Indonesia s telco industry s competitive phases Source: TRIM Research Figure 2. Current marketing positioning of GSM operators Telkomsel Indosat XL Three Postpaid brand (high end customers) Halo Matrix XL Tri Quality brand (medium to high end customers) Simpati Mentari XL Tri Fighting brand (low to medium end customers) As IM3 Axis Tri Source: TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 2

3 Substitution to data service There are three main services that telco operators provide: Voice, SMS, and Data. As smartphone adoption (~14% in 213) keep increasing, we think there is higher risk of substitution to data service rather than voice and SMS service. Hence, operators might tend to increase voice and SMS price to balance the decline in voice and SMS traffic. Figure 3. Porter s five competitive forces analysis Source: TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 3

4 Growing usage of data service from increasing smartphone penetration As mobile subscribers penetration rate in Indonesia already reached 125%, we think there won t be a significant increase in the total number of subscribers in the industry. However, we think there s still potential upside of further growth for the cellular business from the growing data usage on the back of growing smartphone adoption in Indonesia. This is also implied from 3G penetration rate in Indonesia which was still at 45%, significantly below the mobile subscribers penetration rate, considering that most of mobile subscribers in Indonesia still use feature phone (only 2G; voice and SMS). It is expected that smartphone penetration in Indonesia to reach 38% in 217E from 14% in 213. Figure 4. Mobile Subscribers Penetration in ASEAN, China, and India (213) Source: World Bank, ITU, TRIM Research Figure 5. A snapshot of mobile subscribes and usage in Indonesia Source: Internet live stats, Internet world stats, companies data, TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 4

5 Figure 6. Indonesia s smartphone penetration Figure 7. Social network users in Indonesia(in millions) Source: Statista.com, TRIM Research Source: statista.com, World Bank, TRIM Research Figure 8. Number of Internet Users in Indonesia Figure 9. Average mobile app download rate per capita in selected countries as of 3Q14 Source: Euromonitor, World Bank, TRIM Research Source: statista.com Spectrum allocation resource for competitiveness For 3G service on 21 Mhz spectrum, EXCL has bandwidth as much as Telkomsel s and still more than Indosat s and Three s. As 9Mhz already set as technology neutral, ISAT also allocated its 1Mhz bandwidth on that band for 3G and 2G service. In total EXCL owned 45Mhz of bandwidth, still lower than Telkomsel and Indosat, but substantially higher than Three. Figure 1. Spectrum allocation Total 85 Mhz 9 Mhz 18 Mhz 21 Mhz 23 Mhz Telkomsel Indosat XL Axiata Hutchison Three Source: Indosat, Telkom, XL, and TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 5

6 Commercial LTE service on 1,8Mhz EXCL s spectrum (22.5Mhz) on 1,8Mhz is as much as Telkomsel and higher than Indosat and Three. This was achieved by acquiring Axis last year (Axis owned 15Mhz of bandwidth on 18Mhz spectrum). Before the acquisition EXCL only had 7.5Mhz on 1,8 band. Although 18Mhz band should be ready for LTE after refarmed (scheduled to finish on November 215), higher usage of 4G service will depend also on the readiness of the ecosystem (4G smartphone penetration rate). We think there will be substantial increase in LTE penetration if the LTE mobile phone price goes down to Rp5K (~USD35) considering that telco operators do not subsidize handset (99% of subscribers using prepaid packages). There s already LTE mobile phone priced at Rp1.1mn (~USD77) based on price survey last May. Figure 11. Refarming on 18 Mhz spectrum Before Refarming After Refarming Source: Indonesia s Ministry of Communication and Informatics PT Trimegah Securities Tbk - SECTOR FOCUS 6

7 (mn) (Rp ) Management s Strategy More sustainable business strategy higher ARPU Starting this year, a new strategy was being deployed by the company by focusing to be a more sustainable and profitable business. The company expects the transformation process (named 3R - Revamp, Rise, Reinvent ) to take months. The 1H15 initiatives ( Revamp phase), including more focus on quality subscribers, gave positive impact to substantially higher 1H15 ARPU to Rp3K (+25%YoY) despite losing significant number subscribers (-27%YoY), which according to the company are low-revenue subscribers. We expect similar trend of declining number of subscribers until end of this year (-25%YoY), which then continue to positive growth in the future (3/2% in 216E/17E). Figure 12. EXCL s subscribers and implied ARPU growth Number of subscribers (LHS) Implied ARPU (RHS) Figure 13. Revenue breakdown Figure 14. Cellular revenue breakdown Others 1% Inteconne VAS 4% ct 13% Voice 36% Data 25% PT Trimegah Securities Tbk - SECTOR FOCUS 7 SMS 21%

8 (petabyte) (Rp / kb) Data consumption drive cellular business future growth Voice and SMS still accounts most (FY14 ~57%) of EXCL s cellular revenue. However, as data usage continues to rise supported by growth of smartphones users, we expect more subscribers to use and prefer data services (FY14 ~25% of cellular revenue) compared to SMS and voice in the future. During 2Q15, EXCL was able to improve its effective data pricing (Rp/kb) slightly by 4%QoQ. The company actually already increased its headline data pricing for several of its product offerings last Dec, but it was yet translated to better effective data price as data traffic kept going up implying high appetite of data consumption. We think the effective data price QoQ increase was also contributed from the company s effort to improve its subscriber mix (focus more to high ARPU subscriber), managing data abuser, and added with positive seasonality impact of 2-week Ramadhan effect in July during 1H15. Note that 2Q15 data traffic was slightly down by 2%QoQ though. We expect data revenue to grow by 15/25%YoY in 215E/16E (vs. FY13/14 16/42%; 1H15 14%YoY vs. 1H14 43%YoY) based on rising data usage and relatively slower decline of effective data pricing. Figure 15. QoQ data traffic and rate changes Data traffic (LHS) Rate (Rp/kb) Figure 16. EXCL s Total BTS Figure 17. BTS composition 4, 1% 3, 8% 2, 1, Q15 6M15 6% 4% 2% % Q15 6M15 2G BTS 3G BTS 4G BTS 2G BTS 3G BTS Source: Company Source: Company PT Trimegah Securities Tbk - SECTOR FOCUS 8

9 (Rp tr) (bn minutes) (Rp / minute) (bn) (Rp / sms) Slower voice and SMS growth migration to data EXCL s voice traffic (outgoing minutes) started to post negative growth (-13%YoY) in FY14 (vs. FY12/13 +15/ +1%YoY) with further decline in 1Q15/2Q15 by-8%/-4%qoq. However, FY14 voice revenue still slightly grew (+3%YoY) as voice price (Rp/minute) was up by 19%YoY (vs. FY12/13 9%/-8%.). We estimate growth in 215E/16E voice revenue to be 1/3%YoY (vs. FY12/13/14 at +6/-7/+3%YoY) relying mostly on rising voice price. As we expect higher adoption of smartphone (higher usage of mobile messaging service), we predict 215E/16E SMS traffic to go down by -28/-15%YoY (1H15 28%YoY vs. 1H14 +6%YoY; FY13/14 +6/-2%). We expect the company to increase SMS price (Rp/sms) in 215E/16E by 17/15%YoY (1H15 19%YoY vs. 1H14 1% YoY) to partially offset the falling SMS traffic. Thus, we think there will be negative growth in SMS revenue (215E/16E -15/-3%YoY vs. FY14 +3%YoY; 1H15 14%YoY vs. 1H14 +5%YoY). For total cellular revenue, we estimate growth of 3/1%YoY in 215E/16E (vs. FY13/14 1/+13%YoY; 1H15 +1%YoY vs. 1H14 +14%YoY) primarily driven by data revenue increase. We expect 216E data s contribution to cellular revenue to be ~33% (up from FY14 ~25%), while contribution from voice and SMS to be ~35% (FY14 36%) and ~16% (FY14 21%) respectively, implying substitution to data service by the cellular subscribers. Figure 18. Voice traffic and rate Figure 19. SMS traffic and rate Outgoing minutes (LHS) Revenue per outgoing minute (RHS) Outgoing SMS (LHS) Revenue / outgoing (RHS) Figure 2. Cellular revenue Figure 21. Cellular revenue composition E 216E 217E Interconnect and others VAS Data SMS Voice 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % E 216E 217E Voice SMS Data Interconnect and others VAS PT Trimegah Securities Tbk - SECTOR FOCUS 9

10 Figure 22. EXCL s forecast drivers 31 December 213A 214A 215E 216E 217E 218E 219E XL Axiata Mobile subs (m) Subscriber market share 21.3% 19.% 14.1% 14.3% 14.4% 14.5% 14.8% Implied Net ARPU (Rp ) % change -11.% -1.6% 15.% 22.1% -1.8% 1.% 1.2% Voice Outgoing MOU (min/sub/month) Total MOU (min/sub/month) Total minutes carried (b min) % change 1.3% -13.% -17.7% -6.5% 2.% 4.% 4.% Incoming minutes (%) 5% 5% 5% 5% 5% 5% 5% Voice revenue / outgoing minute (Rp) % change -8.7% 18.7% 23.6% 1.3% 1.% 1.% 1.% Data Data traffic (terabyte) 54, , , , ,17 32, ,92 % change 141.5% 126.7% 46.4% 32.% 15.% 1.% 8.% Data Rate (Rp/kb) % change -51.8% -37.6% -21.2% -5.1% -5.% -3.% -1.% SMS Outgoing SMS (bn) % change 5.9% -2.1% -27.5% -15.2% -1.% -1.% -1.% Revenue / outgoing SMS (Rp) % change -9.2% 5.6% 17.1% 14.6%.5%.5%.5% Gross revenue (Rp t) % change.3% 1.4% -2.1% 6.6% 1.% 3.2% 3.9% Net revenue (Rp t) % change 1.4% 1.3% -2.1% 6.6% 1.% 3.2% 3.9% EBITDA (Rp t) % change -11.1% -.4% -4.3% 8.8% 2.7% 3.9% 4.6% EBITDA margin 4.7% 36.8% 35.9% 36.6% 37.3% 37.5% 37.8% Capex / revenue 32.6% 24.5% 26.5% 22.% 2.% 18.% 18.% Source: Companies and TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 1

11 Rp tr (Rp tr) Lower leased tower revenue (impact from tower sales to SUPR) Last December, EXCL completed a sale and lease back transaction for its 3,5 tower with SUPR. This caused EXCL s 1H15 other telecommunication segment revenue significantly decreased (~35%YoY), which lead to EXCL s 1H15 net revenue declined by -4%YoY (cellular revenue growth almost flat at 1%YoY). For 215E/16E, we estimate EXCL s net revenue growth at a pace of 2/+7%YoY (vs. FY13/14 +1/+1%YoY). The company s 1H15 revenue accounts 48% of our FY target, Figure 23. EXCL s net revenue Cellular net disc. Other telecom service Reducing inefficiency post-axis integration EXCL s opex excluding depreciation and amortization (D&A) are mostly contributed from infrastructure (~35% of FY14 revenue; ~56% of total Opex excl. D&A) and interconnection & telco service (~14% of FY14 revenue; ~23% of total Opex excl. D&A). Network expansion, tower sales to SUPR, and higher frequency cost from Axis acquisition & integration contribute to rise in infrastructure expense (+15%YoY), but lower SMS interconnect cost and service access payment to RIM mostly helped to decreased its interconnection and other direct expenses significantly (-29%YoY). As of March 215, Axis already turned break-even on EBITDA level, after previously posted negative EBITDA when acquired by EXCL around March 214. Number of Axis contract staffs stays with EXCL also declined resulting to lower personnel expense (-9%YoY; ~5% to revenue). We estimate the increase of opex excl. D&A in 215E/16E at 1%YoY/+5%YoY with ratio to revenue at 64/63% respectively, assuming the company will be able to increase efficiency from Axis infrastructure further, e.g. relocate old Axis site or decrease tower leases to avoid duplicate sites. Figure 24. Opex excl. D&A Figure 25. Opex excl. D&A composition Axis acquis ition Towers ' s ale-andlease-back to SUPR 1% 4 8% 3 6% 2 4% 1 2% % Infrastructure Marketing & sales Supplies & overhead Interconnection & telco service Personnel Others Personnel Interconnection & telco service Supplies & overhead Marketing & sales Infrastructure PT Trimegah Securities Tbk - SECTOR FOCUS 11

12 (Rp tr) Rp tr Promising sign of EBITDA recovery As 1H14 EBITDA (margin 37%) yet accounted for Axis acquisition (around end of 1Q14), the company posted 1H15 EBITDA decline (-9%YoY; margin 35%). However, 2Q15 EBITDA has showed promising sign of recovery through positive growth of 7%QoQ (2Q14 6%QoQ; 1Q14 2%QoQ vs. 1Q15 18%QoQ) accompanied with rise in EBITDA margin to 36% (2Q14 34%; 1Q14 4% vs. 1Q15 34%). We still project a decline in EBITDA this year (- 4%YoY vs. FY13/14 11/+.4%YoY), which then recover to positive growth next year (9%YoY) with 215E/16E EBITDA margin at 36/37% based on higher infrastructure efficiency. 1H15 EBITDA is 47% of our 215E FY estimate. Note that 4Q14 EBITDA margin of 39% including one-off impact from completion of Axis integration and renegotiation of contracts. According to EXCL, if those one-off impacts were excluded, 4Q14 EBITDA margin was ~36%. We have not assumed additional tower sales in our forecast. Figure 26. Quarterly Revenue, opex excl. D&A, and EBITDA Axis acquis ition Towers ' s ale-and-leas e-back to SUPR % 3% 2% 1% % Net revenue Opex excl. D&A EBITDA EBITDA margin 4Q14 EBITDA margin without one-off = ~36% Figure 27. EBITDA and EBITDA margin E 216E 217E 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % EBITDA EBITDA margin PT Trimegah Securities Tbk - SECTOR FOCUS 12

13 Possibility of lower USD debt exposure this year EXCL plans to lower its borrowing and reduce USD exposure significantly in the next 3-6 months. Among the total of ~USD1.6tr loan, the effort to reduce borrowing and USD exposure will be prioritized respectively on the unhedged external debt (~USD 652mn), hedged external debt (~USD 4mn), and then the loan from Axiata (~USD 5mn). Currently, the company is exploring the possibility of refinancing (converting to IDR loan), paying back, and/or extending the maturity of the USD loan. For restructuring plan of Axiata loan, the company is still on discussion with Axiata. The company s 1H15 net debt to EBITDA was 2.9x, already down from 3.2x in 1H14. It had cash amount of Rp5.5tr in 1H15 (vs. 1H14 Rp2.5tr). EXCL recorded forex loss of Rp1.5tr last semester (vs. 1H14 Rp516bn; FY14 Rp1.3tr). We haven t accounted this potentially lower forex exposure to our estimation. Our 215E/16E net debt to EBITDA is at 3.6/3.1x. Figure 28. Interest bearing debt breakdown as of 1H15 IDR Bank Loan 29% USD Loan (USD 1.55bn) 71% Source: Company Contribution from JV ( Elevania ) yet significant EXCL has 5% ownership in JV ( XL Planet established since 213) to build e-commerce ( open marketplace ) website named Elevania (launched Mar 214). As of 1H15, the company recorded its investment in JV of Rp216bn, only ~1% of EXCL s market cap. Last year, the loss as share of result from JV reached ~Rp12bn. According to the company, the JV might book slightly higher loss this year compared to last year. PT Trimegah Securities Tbk - SECTOR FOCUS 13

14 Figure 29. TRIM vs. Consensus Estimates EXCL Rp bn 215E 216E 217E Revenue TRIM 22,973 24,494 24,737 Cons 23,193 24,628 26,558 % -.9% -.5% -6.9% EBITDA TRIM 8,249 8,975 9,216 Cons 8,317 9,196 1,92 % -.8% -2.4% -8.7% Operating Profit TRIM 981 1,315 1,18 Cons 1,475 2,211 2,99 % -33.5% -4.5% -59.4% Core Profit TRIM Cons ,414 % nm -71.5% -84.2% Source: Bloomberg, TRIM Research TRIM versus Consensus Our 217E revenue and EBITDA is below consensus probably because we assume lower subscriber, lower ARPU and/or slower impact from LTE 18Mhz service relative to consensus. We are also slightly more conservative on our 217E EBITDA margin (37.3%) compared to consensus (38.%). This might also happen because we have not included the assumption of additional tower sales between 215E-17E which could lower the revenue and reduce the EBITDA margin estimates (due to additional cost to lease tower instead of previously using its own tower). We use EV/EBITDA as basis for our valuation. Our operating profit is below consensus as our D&A (215E-17E ~32% to revenue) is higher than consensus by 5/9/11%, which might happen due to higher depreciation rate that we used relative to consensus. The capex assumption that we used is in-line for 215E, but lower in 216E/17E compared to consensus by 2/28%. If EXCL sells its tower, which we have not included in our forecast assumption, it could lower its depreciation expense. We forecast the company will still booked core loss in 215E compared to consensus estimate of core profit. Meanwhile, our core profit in 216E-17E is significantly lower than consensus. The difference might be related to difference in forecast of interest expense, forex loss, share of profit (loss) from JV, and other income (expense). Our net debt in 215E/16E/17E are higher than consensus by 39/37/42% respectively. We have not included the plan to issue Sukuk, nor the USD loan restructuring assumption in our forecast, especially the USD 9mn loan which will due in 217E (bullet repayment). PT Trimegah Securities Tbk - SECTOR FOCUS 14

15 Figure 3. DCF calculations YE Dec 31 (in Rp b) 217F 218F 219F 22F 221F 222F 223F 224F 225F 226F EBIT 1,18 1,263 1,634 1,853 2,938 2,977 3,139 3,257 3,328 3,429 Tax Rate 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% EBIT*(1-t) ,226 1,39 2,24 2,233 2,354 2,443 2,496 2,572 + D & A 8,36 8,315 8,385 8,652 8,34 8,299 8,566 8,845 9,135 9,345 - Capex (4,947) (4,597) (4,777) (4,976) (5,163) (5,36) (5,58) (5,695) (4,887) (5,9) + Decrease/(increase) in non cash working capital 31 (422) (195) (163) (247) (213) (1,75) FCFF 4,4 4,243 4,639 4,94 4,828 5,13 4,338 5,672 6,827 6,978 FCFF - Discounted 3,663 3,552 3,553 3,436 3,95 2,94 2,328 2,785 3,67 2,868 Value of cash-flows thro ,285 Terminal value- 4x EV/EBITDA 2,997 Risk-Free rate 8.4% Equity market risk premium 5.% Enterprise value 52,282 Beta.652 Net Debt / (Cash) 3,9 Cost of equity 11.7% Equity value 22,192 Post-tax cost of debt 8.3% Value per share 2,599 Debt/Capital ratio 69.2% WACC 9.3% Target price after rounding 2,6 Source: TRIM Research Figure 31. Forward historical EV/EBITDA Jul-1 May-1 Mar-1 Jan-1 Jul-11 May-11 Mar-11 Jan-11 Nov-1 Sep-1 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Sep-15 Fw-EV/EBITDA Fw-EV/EBITDA avg Fw-EV/EBITDA + 1 STD Fw-EV/EBITDA - 1 STD Fw-EV/EBITDA - 2 STD Fw-EV/EBITDA + 2 STD Source: Company, Bloomberg, TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 15

16 Figure 32. Regional comparison Ticker Name EV/EBITDA P/E 216E 217E 216E 217E Indonesia TLKM Telkom (Telekomunikasi Indonesia) ISAT Indosat EXCL XL AXIATA nm 91.7 Singapore ST Singtel (Singapore Telecommunications) STH Starhub M1 M Malaysia Axiata Axiata Digi Digi.com Maxis Maxis T Telekom Malaysia Philippines TEL Philippine Long Distance GLO Globe Telecom Thailand ADVANC AIS (Advance Info Services) DTAC Total Access Communication Average All nm 21.3 Average Excl. Indonesia Source: Bloomberg, TRIM Research Figure 33. Regional telco companies profile Country Mobile Subs. Smartphone Ticker Company Name Mobile Service Penetration* Penetration** Revenue Contribution Indonesia 125% 23% TLKM Telkom (Telekomunikasi Indonesia) ~74%*** ISAT Indosat 81% EXCL XL AXIATA 94% Singapore 156% 87% ST Singtel (Singapore Telecommunications) 43% STH Starhub 52% M1 M1 62% Malaysia 145% 8% Axiata Axiata 85% Digi Digi.com 9% Maxis Maxis NA T Telekom Malaysia NA Philippines 15% 15% TEL Philippine Long Distance 65% GLO Globe Telecom 79% Thailand 14% 49% ADVANC AIS (Advance Info Services) 84% DTAC Total Access Communication NA *) As of 213 **) Article dated Jan 214 ***) Telkomsel's revenue compared to consolidated TLKM revenue Source: Bloomberg, World Bank, ITU, Nielsen.com, TRIM Research PT Trimegah Securities Tbk - SECTOR FOCUS 16

17 Valuation: Neutral with 7% upside to TP Rp2,6 We initiate EXCL with a Neutral on the back of: 1) Promising sign of QoQ EBITDA recovery as Axis already turned break-even (EBITDA) and positive result of the company s transformation strategy so far; 2) Benefit from Indonesia s strong demand for data consumption; 3) Healthier competition among industry players supporting better effective service price (esp. data price). Our DCF-based TP uses WACC of 9.3% and terminal value of 4x EV/EBITDA. This is lower than Indonesia s telco industry leader, Telkomsel (TLKM s subsidiary), which we valued using terminal value s EV/EBITDA of 9x considering that TLKM s (~45%) market share is bigger than EXCL s (~19%) and TLKM s better balance sheet compared to EXCL s. EXCL is trading at 5.7/5.5x of 216E/17E EV to EBITDA. This is below TLKM which we think is justified considering Telkomsel s market leader position and strong balance sheet (with lower IDR weakness risk) relative to EXCL and also ISAT. However, the valuation is significantly higher than ISAT (216E/17E consensus at 2.8/2.8x), despite EXCL s EBITDA market share (~14%) is lower than ISAT (~19%) among Big 3 operators. In terms of PE valuation, EXCL trades at 31.5x 216E PE and 4.1x 217E PE vs. (216E/17E PE for TLKM 17/15x and ISAT 17/12x). Compared to regional peers, EXCL trades at a discount to average regional telco excl. Indonesia of 9.4/9.x 216E/17E EV to EBITDA. We estimate that EXCL still booked core loss next year and recover to positive in 217E). However, its 17E PE is still significantly higher than average regional telco excl. Indonesia. Risks Foreign exchange risk As telco operator is a capital intensive business and its capex, e.g. for network equipment, tends to be imported with payment to vendor using USD, the company used USD loan to help to finance its capex. Meanwhile, most of the company s revenue is in IDR. IDR weakness to USD could cause higher forex loss, interest expense, and lower profit, and also higher principal payment for the USD loan leading to higher risk of liquidity. IDR weakness to USD also cause increase in fund amount required to finance its capex and rise in operational cost. This might lead to lower network upgrade, expansion, less maintenance, and/or less purchase of items and services, which might cause the company provide service with quality not as high as before and lower its ability to compete. Competition Risk We think the telco industry in Indonesia is very competitive. If competitor lower its price substantially as its marketing strategy to grab market share for some times, it might cause the company losing its price-sensitive subscribers and follow to decrease its price as well to remain competitive. This could lead to price war causing the industry cannot monetize its investment properly nor growing its business in a sustainable way. Technology change risk As technology kept evolving, if the company cannot or too slow to invest in new technology which the industry already adopted, the company could lose its competitiveness, such as in form of declining ARPU. Interest rate risk The company is exposed to risk from interest rate changes for its interest bearing debt. If interest rate goes up, it cause higher interest expense and lower bottom line. PT Trimegah Securities Tbk - SECTOR FOCUS 17

18 Company Background PT XL Axiata Tbk was founded in 1989 as a trading and general services company under the name of PT Grahametropolitan Lestari. It then entered the telecommunications industry in 1996 as Indonesia s first private cellular mobile telephone company and went public in 25. As of today, 66.5% of XL s shares are owned by Axiata through Axiata Investments (Indonesia) Sdn. Bhd. and the remainder 33.5% by public. PT Trimegah Securities Tbk - SECTOR FOCUS 18

19 Income Statement (Rpbn) Year end Dec F 216F 217F Revenue 21,265 23,46 22,973 24,494 24,737 Revenue Growth (%) 1.4% 1.3% -2.1% 6.6% 1.% Gross Profit na na na na na Opr. Profit 2,91 1, ,315 1,18 EBITDA 8,659 8,623 8,249 8,975 9,216 EBITDA Growth (%) -11.1% -.4% -4.3% 8.8% 2.7% Net Int Inc/(Exp) , Gain/(loss) Forex -1,37-1,295-1,512 Other Inc/(Exp) Pre-tax Profit 1,375-1, Tax Minority Int. Extra. Items Reported Net Profit 1, Core Net Profit 1, Growth (%) -34.8% -92.4% nm nm -1.4% Dividend per share growth (%) -51.9% -92.6% nm nm -1.4% Dividend payout ratio 52% -5% 1% 12% 11% Balance Sheet (Rpbn) Year end Dec F 216F 217F Cash and equivalents 1,318 6,951 3,962 3,291 1,31 Other curr asset 4,526 6,358 5,285 5,981 6,98 Net fixed asset 3,928 35,27 33,824 31,378 28,2 Other asset 3,55 15,114 21,54 21,584 21,366 Total asset 4,278 63,631 64,576 62,233 56,696 ST debt 3,125 3,922 3,228 15,872 3,54 Other curr liab 4,86 11,477 9,178 9,629 9,777 LT debt 14,697 25,77 3,824 14,952 21,898 Other LT Liab 2,349 8,478 7,949 7,928 7,623 Minority interest Total Liabilities 24,977 49,583 51,18 48,381 42,352 Shareholders Equity 15,3 14,48 13,396 13,852 14,344 Net debt / (cash) 16,54 22,677 3,9 27,533 23,921 Total cap employed 32,347 48,233 52,169 36,733 43,865 Net Working capital -2,87-2,89-3,159-16,229-5,72 Debt 17,822 29,628 34,52 3,824 24,952 Cash Flow (Rpbn) Year end Dec F 216F 217F Net Profit 1, Depr / Amort 5,759 6,841 7,268 7,66 8,36 Chg in Working Cap -1,286 4,838-1, Others 1,662-2,336 CF's from oprs 7,167 8,54 5,38 7,935 8,621 Capex -7,394-7,95-6,88-5,389-4,947 Others ,583 CF's from investing -7,981-16,678-6,88-5,389-4,947 Net change in debt 3,336 4,961-2,242-3,228-5,872 Others -2,12 8, CF's from financing 1,324 13,769-2,283-3,218-5,935 Net cash flow 59 5,632-2, ,262 Cash at BoY 89 1,319 6,953 3,964 3,293 Cash at EoY 1,318 6,951 3,962 3,291 1,31 Free Cashflow , ,546 3,674 Key Ratio Analysis Year end Dec F 216F 217F Profitability Gross Margin (%) NA NA NA NA NA Opr Margin (%) 13.6% 7.6% 4.3% 5.4% 4.8% EBITDA Margin (%) 4.7% 36.8% 35.9% 36.6% 37.3% Core Net Margin (%) 9.1%.6% -.2%.9%.9% ROAE (%) 12.7% 1.% -.3% 1.7% 1.6% ROAA (%) 5.1%.3% -.1%.4%.4% Stability Current ratio (x) Net Debt to Equity (x) Net Debt to EBITDA (x) Interest Coverage (x) Efficiency A/P (days) NA NA NA NA NA A/R (days) Inventory (days) NA NA NA NA NA Interim Result (Rpbn) 2Q14 3Q14 4Q14 1Q15 2Q15 Capital History Date Sales 6,34 5,994 5,919 5,481 5,61 Gross Profit NA NA NA NA NA EBITDA 2,62 2,61 2,3 1,877 2, Opr. Profit Net profit Core profit Gross Margins (%) NA NA NA NA NA EBITDA Margins (%) 34.2% 34.4% 38.9% 34.2% 35.6% Opr Margins (%) 6.7% 1.7% 1.7% 1.6% 3.9% Net Margins (%) 6.7% 1.7% 1.7% 1.6% 3.9% Core Margins (%).3% -2.6% 3.4% -1.2% -2.5% 29-Sep-5 IPO@Rp2, PT Trimegah Securities Tbk - SECTOR FOCUS 19

20 PT Trimegah Securities Tbk Gedung Artha Graha 18 th Floor Jl. Jend. Sudirman Kav Jakarta 1219, Indonesia t f DISCLAIMER This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to b uy. This report has been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Secu rities. While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication, Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoeve r for any direct or consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in future participate in an offering of the company s equity securities.