Mandiri Sekuritas EXCL: Riding on a high wave

On the back of sustainable earnings growth and the ability to increase revenue per minute on voice, which suggests improving voice tariffs, we raised our TP for XL Axiata to Rp4,300/share. We think voice tariffs have no way but up as the battle is shifting toward data and content offerings. Showing its first mover capabilities, we likewise raised our earnings forecast by 14% and 8% respectively for FY10-11F. We maintain buy for the stock which trades at PER1F of 14.2x.

On track to meet lofty expectations. XL has raised the bar with 1Q10 results above our and market expectations. This year, it’s looking to grow revenue in the high-teens, (the highest rate of growth among the Big 3 telcos) while improving EBITDA margins to the high end of 40%, while internally funding its entire capex allotment of Rp4.5-Rp5tn. So far, it has not disappointed, with 1Q10! top-line of Rp4.17tn (+42%yoy) and interim EBITDA margin of 51% (from 38% in 1Q09).

It’s not just the top-line but costs have been managed well too. The disproportionate growth in costs (+10%yoy) relative to revenue growth (+42%yoy), also helped boost profitability in 1Q10. EXCL was able to cut interconnection and starter pack costs as well as general overhead spending. Furthermore, 1Q10 sales and marketing expense as a percent of revenue fell to 6% from 8% in1Q09.

Some moderation in subsequent quarters as competition catches up. Market dynamics should result in tighter competition coming from major competitors particularly in SMS packages/offerings as MICT, the regulating body has yet to issue a revised ruling on SMS tariffs limitation, thus flexibility remains at play. Bundled products (i.e., SMS plus 1 or 2 MB of free downloads) could create some growth congestions, while competition in voice tariffs has mellowed down (as shown with EXCL’s revenue per minute improving by 17! %qoq to R p88), now shifting towards data and SMS. Thus, our top-line forecast remains relatively unchanged while assuming better cost efficiencies resulting to an upgrade in FY10-11F net earnings by 14% and 8%, respectively.

New TP of Rp4,300/share. With the adjustments in effect, we raised our DCF-derived TP to Rp4,300/share, while maintaining a buy on the stock, which currently trades a PER10F of 14.2x, posing a 16% upside to our TP.