Merger With Smartfren And Integration Of First Media Will Expand Subscriber Base And Strengthen ISP Position In Indonesia

Key Takeaways

• Strategic mergers and acquisitions strengthen XL Axiata's market position and align with its convergence strategy to boost revenue from expanded broadband and subscriber base.
  
• Digitalization and cost optimization enhance profitability and user engagement, driving ARPU growth and positioning the company for future connectivity advancements.
  
• Intense price competition and regulatory uncertainties threaten XL Axiata's revenue growth, margins, and competitive advantage amid market and economic challenges.

Catalysts

Provides telecommunication, telecommunications network, and multimedia services for consumers and businesses in Indonesia.

• XL Axiata's strategic merger with Smartfren is expected to create significant synergies by expanding the subscriber base and enhancing network infrastructure. This merger could lead to increased market share, potentially driving revenue growth in the coming years.
  
• The acquisition of fixed broadband customers from Link Net and the integration of First Media into XL Axiata's ecosystem positions the company as a leading ISP in Indonesia. This strategic move reinforces its convergence strategy, likely boosting future revenue by expanding the fixed broadband segment.
  
• Digitalization and personalization through the MyXL and AXISNet applications have increased subscriber engagement, with over 56% of users engaging on these platforms. This digital focus is driving increased ARPU and revenue growth from app channels, which should support sustained future revenue streams.
  
• Cost optimization initiatives, such as improved sales and marketing efficiencies and network infrastructure cost reductions, have led to a 3 percentage point expansion in EBITDA margin and a 45% increase in profit after tax. These ongoing efficiency measures are likely to enhance net margins and profitability moving forward.
  
• The fiberization of 63% of XL Axiata's sites and strategic initiatives aimed at network optimization and capacity enhancement lay a strong foundation for future connectivity upgrades, such as 5G. These technological advancements can provide long-term revenue growth opportunities through improved service offerings and customer experience.

XL Axiata Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming XL Axiata's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 6.6% in 3 years time.
• Analysts expect earnings to reach IDR 2633.2 billion (and earnings per share of IDR 200.66) by about February 2028, up from IDR 1819.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting IDR2905.0 billion in earnings, and the most bearish expecting IDR2261.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the ID Wireless Telecom industry at 13.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.34%, as per the Simply Wall St company report.

XL Axiata Future Earnings Per Share Growth

Risks

• Intense price competition in the fixed broadband and mobile sectors, with aggressive undercutting by incumbents and new entrants offering unsustainably low prices, could lead to pressure on revenue and margins for XL Axiata.
  
• The uncertainty surrounding the completion of the merger with Smartfren and the possible requirement to return spectrum could impact network expansion and competitive advantage, affecting future earnings potential.
  
• Continued aggressive pricing strategies from competitors, particularly in the mobile segment, may challenge XL Axiata's ability to increase ARPU and could adversely impact revenue growth.
  
• The unclear regulatory environment regarding spectrum allocation and pricing, including the introduction of the 1.4 GHz spectrum for fixed wireless, adds potential cost and competitive risks that could affect profitability.
  
• Economic factors such as weak purchasing power and increased competition from Wi-Fi providers could limit growth in customer spending and subscriber additions, potentially hindering revenue growth and net margin expansion.

Valuation

• The analysts have a consensus price target of IDR2961.0 for XL Axiata based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR5000.0, and the most bearish reporting a price target of just IDR2300.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be IDR39867.9 billion, earnings will come to IDR2633.2 billion, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 13.3%.
  
• Given the current share price of IDR2270.0, the analyst price target of IDR2961.0 is 23.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.