XL Axiata (EXCL IJ) BUY. Pursuing growth in outer Java. Equity Indonesia Telecommunication. Re-Initiate Coverage. 09 August 2018

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1 Equity Indonesia Telecommunication XL Axiata (EXCL IJ) BUY Stock Data Target price (Rp) Prior TP (Rp) Shareprice (Rp) Rp3,500 n.a. Rp3,050 Upside/downside (%) Sharesoutstanding (m) 10,688 Marketcap. (US$ m) 2,258 float (%) 33.6 Avg. 6m dailyt/o (US$ m) 2.7 Price Performance 3M 6M 12M Absolute (%) Relative to JCI (%) w high/low (Rp) 4,020-1, Aug-17 Aug-17 Sep-17 Oct-17 Oct-17 Nov-17 Dec-17 EXCL-Rebase Major Shareholders Axiata Investments (Indonesia) Sdn. Bhd. 66.4% Public 33.6% Estimate Change; Vs. Consensus 2018F 2019F Latest EBITDA (Rp bn) 8,858 9,890 Vs. Prior EBITDA (%) n.a. n.a. Vs. Consensus (%) -5% -10% Source: Bloomberg Jan-18 Jan-18 Feb-18 Mar-18 Mar-18 Apr-18 May-18 May-18 Jun-18 JCI Index-Rebase Jul-18 Jul-18 Pursuing growth in outer Java More optimism on healthier industry competition. 4G expansion in outer Java to drive growth. Lowest risk from voice and SMS decline among Big 3 Telcos. 09 August 2018 Re-Initiate Coverage Re-initiate with TP Rp3,500 BUY, 10% discount to 7-yr mean. Outer Java = Key to further growth. XL plans to invest c.55% of 2018 capex in outer Java to reach 4G coverage of 85% of Indonesia s population by end of 1H19 (vs. currently 65-70%), esp. in Kalimantan, Sumatra, and Sulawesi. We view this as positive strategy as it will enable XL to grab opportunity from rising smartphone penetration in outer Java. We expect stable EBITDA margin during expansion phase to outer Java (2018F/19F at 37%) and then to slightly expand gradually thereafter. For comparison, XL s normalized EBITDA margin was 41% in 4Q17, post-acquisition of Axis. Better data pricing in 2H18F to aid performance. XL said it has raised data pricing for certain Axis data packages in May and for XL packages before Lebaran XL also mentioned its intention to gradually improve data pricing further after Lebaran based on market s response. Therefore, we expect revenue growth to accelerate to +7%YoY in 2019F from flat YoY in 2018F (2H18F +6%HoH), slightly outpacing our est. for Telkomsel at -2%YoY, due to short-term pressure of SIM Card re-registration and relatively competitive 1H18 vs. 2H18F. Potential opportunity from subscribers transition to data. We think XL might get slightly better chance to penetrate outer Java in data service compared to voice and SMS considering that interconnection cost does not apply in data and less dependency to one mobile phone number to use data. Furthermore, XL also benefited from being a more data-centric company (based on data user penetration and data revenue contribution as shown in Figure 1-2) among Big 3 Telcos. We expect 2018F/19F strong data traffic growth of 76/69%YoY (vs. Telkomsel 77/49%YoY) and increase in mobile data revenue contribution to 68/76% (above Telkomsel 48/56%). Re-initiate at BUY with TP of Rp3,500. We rolled over our valuation to Our DCF-based TP assumed WACC of 12.5% (Fig 8). Our target 2019 EV/EBITDA for XL is 5.5x, 10% discount to 7-year mean and 25% discount to TLKM (adj. for % ownership in Telkomsel). XL trades at 2019EV/EBITDA of 5x, at -1STD below its 7-yr mean and 32% discount to TLKM. We expect XL to achieve core profit breakeven when its outer Java expansion makes its full-year impact in Our TP translates to 2020EV/EBITDA of 5x, similar to EXCL s -1STD below 7-yr mean. Downside risk: Time lag until more certainty in growth outlook after tightening of starter pack registration. Paula Ruth PT Indo Premier Sekuritas paula.ruth@ipc.co.id Year To 31 Dec 2016A 2017A 2018F 2019F 2020F Revenue (RpBn) 21,341 22,876 22,778 24,372 26,084 EBITDA (RpBn) 8,058 8,321 8,402 8,990 9,831 EBITDA Growth (%) (4.0) Net Profit (RpBn) (6) EPS (Rp) (1) 5 35 EPS Growth (%) (1,582.0) (0.1) nm nm Net Gearing (%) Core PER (x) (211) 87 (73) (79) 6,219 PBV (x) Dividend Yield (%) (0.4) 0.0 EV/EBITDA (x) Source: EXCL, IndoPremier Share Price Closing as of :8-August-2018

2 Fig. 1: Big 3 Telcos Data and smartphone portion of total subs. Fig. 2: Big 3 Telcos Data revenue portion to total revenue 90% 80% 70% 60% 50% 40% % Data and smartphone users penetra total subscribers 70% 60% 50% 40% 30% Data contribution to total netrevenue 30% 20% 10% 0% 2Q17 3Q17 4Q17 1Q18 Telkomsel Indosat* XL 20% 10% 0% 2Q17 3Q17 4Q17 1Q18 2Q18 Telkomsel* Indosat** XL *) 2Q18 smartphone and data user penetration of Telkomsel and XL were 63% and 77% respectively. Source: Companies, IndoPremier *) Telkomsel s data revenue contribution to total Telkomsel s revenue Source: Companies, IndoPremier Fig. 3: XL s data revenue and effective yield Fig. 4: XL fw-hist. EV/EBITDA (3 Aug Jul 2018: 4.5x) 4, (Rp bn) 3,500 3,000 2,500 2,000 1,500 1, (Rp/mb) Jul-18 Apr-18 Jan-18 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 Data revenue (LHS) Effective yield (RHS) 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 -2STD 4.0-1STD 5.1 Avg STD STD 8.3 Source: Companies, IndoPremier Source: Company, IndoPremier 2

3 Fig. 5: Xtream smartphone package* Price Benefit Type ** In Rp 000 In USD (assume Rp14.4K/USD) Dual 4G SIM Feature YouTube *** Data quota On-net Call and SMS Iflix (1 Jun-31 Jul) Implied avg. Rp/MB (1-yr subscription) Xtream Yes "Unlimited" YouTube 24 hours, 1 year 12GB (1GB/month), 1 year) registration cost 0.5 Xtream 1 Pro No "Unlimited" YouTube 24 hours, 1 year 12GB (1GB/month), 1 year) registration cost 0.6 Xtream 1 Plus Yes "Unlimited" YouTube 24 hours, 1 year 12GB (1GB/month), 1 year) registration cost 0.7 *) Terms and Conditions Applied **) All with RAM 1GB / ROM 8GB specification. ***) FUP (Fair Usage Policy) 5GB/day according to Tribun News. Different FUP might apply in different area and/or time of observation. ^ (Smartphone price/12month + monthly top up Rp 25K) / (30x 5GB + 1GB) Note: Evercoss previously (Apr 2018) said the result was above expectation as three weeks after launched, Xtream 1 and 1 Plus (sales) reached 50K units (mostly reached via Evercoss channel), 2.5x initial target of 20K units. Evercoss targets Oct 18 sales volume for those 2 series at 300K units. Source: Company, IndoPremier, Merdeka.com, Tribun News Strategy to grow early adopter of 4G XL s Xtream smartphone bundled package is resulted from cooperation between XL, Evercoss (smartphone brand), and YouTube. This bundled package (requires monthly top-up for 1 year) was launched in Apr The cheapest smartphone package priced Rp669K (c.16% of avg. monthly 2017 GDP per capita). Based on the XL s product description, Xtream smartphone is available in stores and 6 popular e-commerce channels: Tokopedia, Lazada, Bukalapak, Blibli, MatahariMall, and Shopee. We found cheaper price for Xtream 1 in one of sellers in BukaLapak e-commerce (c. 16% cheaper than price mentioned in Figure 5) which also allows 0% instalment for 12 month at Rp47K/month, relatively affordable enough to trigger wider penetration of 4G users in Indonesia, in our view. Company said Xtream has received (positive) overwhelming response in 2Q18. XL said this package gives positive low-single-digit margin (smartphone not subsidized), but bring long-term benefit as it triggers user to switch to 4G (typically higher ARPU than) from non-4g and focusing on blue collar segment. In the future, XL plans to release other smartphones for white collar segment. 3

4 Fig. 6: Forecast drivers Description FY16 FY E 2019E 2020F XL Axiata Mobile subs (m) Implied Net ARPU (Rp 000) % change 6.9% -4.8% -6.9% 3.5% 0.2% Voice* Total Outgoing Minutes % change -57.6% -11.6% -11.0% -11.0% -10.0% Voice revenue / outgoing minute (Rp) % change 100.0% -18.7% -18.0% -11.0% -10.0% Data Data traffic (terabyte) 503,200 1,249,500 2,197,871 3,714,401 4,910,438 % change 162.5% 148.3% 75.9% 69.0% 32.2% Data Rate (Rp/MB) % change -50.2% -34.6% -33.0% -30.0% -14.0% SMS* Outgoing SMS (bn) % change -75.4% -17.3% -10.7% -10.0% -10.0% Revenue / outgoing SMS (Rp) % change 180.3% -20.6% -18.0% -10.0% -10.0% Gross revenue (Rp t) % change -6.7% 7.0% -0.3% 7.0% 7.0% Net revenue (Rp t) % change -6.7% 7.2% -0.4% 7.0% 7.0% EBITDA (Rp t) % change -4.0% 3.3% 1.0% 7.0% 9.4% EBITDA margin 37.8% 36.4% 36.9% 36.9% 37.7% Core Profit (Rp bn) Capex / revenue 30.3% 31.4% 31.2% 28.0% 26.5% *) Voice and SMS figures are estimate. Starting 2Q16, voice and SMS traffic were not disclosed by company. **) Our 2H18F effective data yield is Rp6.8/MB (lower than 1H17 Rp7.5/MB, but similar to 2Q18). Source: Company, IndoPremier 4

5 Fig. 7: 2Q18 results EXCL 2Q17 1Q18 2Q18 QoQ YoY 6M17 6M18 YoY 6M18 / FY18E (%) 6M18 / old cons (%) Sales 5,668 5,266 5, % 2.0% 10,934 11, % 48.5% 46.0% EBITDA 2,073 1,849 2, % 3.1% 3,921 3, % 47.4% 44.1% Normalized EBITDA 2,096 1,986 2, % -4.6% 3,958 3, % NA 44.1% Operating Profit % -60.6% % 38.6% 15.6% Net Profit (97) NM NM 143 (82) NM NM NM Core Profit 17 (34) (81) NM NM (35) (115) NM NM NM EBITDA Margin 36.6% 35.1% 37.0% 35.9% 36.1% Opr Margins (%) 6.5% 2.6% 2.5% 4.9% 2.6% Net Margins (%) 1.7% 0.3% -1.7% 1.3% -0.7% Source: Company, IndoPremier Fig. 8: Risk-free-rate and terminal EV/EBITDA assumption Risk- rate 7.5% Equity market risk premium 6.0% Beta year Beta Cost of equity 15.4% Post-tax cost of debt 7.9% Debt/Capital ratio 38% WACC 12.5% Terminal EV/EBITDA 5.6 Source: Company, IndoPremier, Bloomberg Potential acceleration in long-term EBITDA growth. There might be short-term pressure in share price as we conservatively estimate 2018/19 EBITDA at below cons. However, we assume investors will eventually focus on higher EBITDA growth trajectory in the future from: 1) Growing data demand in Indonesia; 2) Lower uncertainties post-sim card registration; 3) Growth opportunity in outer Java. Moreover, consensus est. might be less dependable for now considering relatively substantial variance between cons 18F/19F EBITDA low end (14/23% above) to high end. Risks Upside risk: Stronger than expected data demand, faster than expected return from investment in data network (and/or core profit turnaround), significantly stronger trend in Rupiah vs. USD, further potential upside considering XL s highest share price last year (before market gradually pricing in intense price competition in 3Q17 and SIM card registration) was Rp4,020, c.32% above current share price. Downside risk: Short-term forex risk, unsustainable improvement in data yield. XL s USD debt accounted 31% of total debt as of 2Q18, with maturity in The company hedged USD debt (for principal) at c.rp14.6k/usd based on 2Q18 disclosure. On 2 Feb 2018, Bloomberg and CNN Indonesia reported: EXCL might expand to triple play service (pay TV, broadband, and fixed line) with investment (est. USD500mn in 3-5 years); the investment might include options of acquisition and JV with cable TV companies; EXCL use small percentage of its capex to launch new Pay TV and gradually expand it in the next five year. We have not included potential acquisition or JV with cable (IP) TV and/or fixed broadband company in our estimates. 5

6 Year To 31 Dec (RpBn) 2016A 2017A 2018F 2019F 2020F Income Statement Net Revenue 21,341 22,876 22,778 24,372 26,084 Cost of Sales Gross Profit 21,341 22,876 22,778 24,372 26,084 SG&A Expenses (21,329) (21,505) (22,042) (23,488) (24,777) Operating Profit 12 1, ,308 Net Interest (1,533) (1,295) (1,330) (1,399) (1,270) Forex Gain (Loss) 351 (30) Others-Net 1, Pre-Tax Income (8) Income Tax (18) (124) Minorities Net Income (6) Balance Sheet Cash & Equivalent 1,400 2,455 1,068 1,245 1,341 Receivable Inventory Other Current Assets 4,583 3,773 4,305 4,451 4,733 Total Current Assets 6,807 7,181 6,332 6,726 7,160 Fixed Assets - Net 33,183 34,934 33,315 30,914 28,211 Goodwill 6,681 6,681 6,681 6,681 6,681 Non Current Assets 8,056 7,525 8,541 9,473 9,568 Total Assets 54,896 56,321 54,869 53,795 51,621 ST Loans Payable 6,503 7, ,695 8,236 Other Payables 4,329 3,979 3,244 2,939 3,109 Current Portion of LT Loans 3,645 3,771 4,140 4,575 0 Total Current Liab. 14,477 15,227 14,576 15,210 11,345 Long Term Loans 11,026 10,980 10,238 8,663 9,863 Other LT Liab. 8,184 8,484 8,431 8,129 8,259 Total Liabilities 33,687 34,691 33,245 32,001 29,467 Equity 13,208 13,226 13,226 13,226 13,226 Retained Earnings 8,002 8,405 8,399 8,568 8,927 Minority Interest Total SHE + Minority Int. 21,209 21,631 21,625 21,794 22,153 Total Liabilities & Equity 54,896 56,321 54,869 53,795 51,621 Source: EXCL, IndoPremier 6

7 Year to 31 Dec 2016A 2017A 2018F 2019F 2020F Cash Flow Net Income (Excl.Extraordinary&Min.Int) (6) Depr. & Amortization 7,064 6,167 6,871 7,298 7,637 Changes in Working Capital 1,178 1,147 (503) Others , Cash Flow From Operating 9,486 8,522 7,626 8,266 9,309 Capital Expenditure (6,401) (7,387) (6,267) (5,829) (5,029) Others Cash Flow From Investing (6,200) (6,974) (6,078) (5,748) (4,935) Loans (5,385) 80 (373) (1,140) (3,375) Equity 6, Dividends (11) Others (6,251) (1,119) (1,760) (1,816) (1,344) Cash Flow From Financing (4,915) (1,021) (2,134) (2,840) (4,730) Changes in Cash (1,630) 527 (585) (322) (355) Financial Ratios Gross Margin (%) Operating Margin (%) Pre-Tax Margin (%) Net Margin (%) ROA (%) ROE (%) ROIC (%) Acct. Receivables TO (days) Acct. Receivables - Other TO (days) Inventory TO (days) Payable TO (days) Acct. Payables - Other TO (days) Debt to Equity (%) Interest Coverage Ratio (x) Net Gearing (%) Source: EXCL, IndoPremier 7

8 Head Office PT INDO PREMIER SEKURITAS Wisma GKBI 7/F Suite 718 Jl. Jend. Sudirman No.28 Jakarta Indonesia p f INVESTMENT RATINGS BUY : Expected total return of 10% or more within a 12-month period HOLD : Expected total return between -10% and 10% within a 12-month period SELL : Expected total return of -10% or worse within a 12-month period ANALYSTS CERTIFICATION. The views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. DISCLAIMERS This research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendations contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. PT. Indo Premier Sekuritas or its affiliates may seek or will seek investment banking or other business relationships with the companies in this report.