Moody's: XL Axiata's FY2013 Results are Broadly in Line with Expectations
Published on: 7th Feb 2014
By: Ian Mansfield
Moody's Investors Service notes that PT XL Axiata's (XL) full year results for 2013 are broadly in line with expectations and support XL's Ba1 rating and stable outlook.
"Reported revenue for 2013 remained flat at IDR21.4 trillion, with declines in voice and SMS revenues being offset by strong revenue growth in data and value-added services," says Nidhi Dhruv, a Moody's Assistant Vice President and Analyst.
"Continued data substitution led to an increase of 29% in the number of data users, and data traffic more than doubled year-on-year. Nonetheless, the growth in data usage has still not proven sufficient to offset the decline in voice and SMS, as such blended average revenue per user (ARPU) fell by 13% yoy, leading to further margin compression," adds Dhruv, who is also the Lead Analyst for XL.
Adjusted EBITDA for 2013 fell to approximately IDR11.8 trillion from IDR12.0 trillion for the same period last year, whereas adjusted EBITDA margin declined to about 55% from 57%, although margins remain strong for the rating level. The declines in EBITDA and EBITDA margin were attributable to continued competition, particularly in voice and data, and a 60% yoy increase in SMS interconnection costs.
XL's leverage, as measured by adjusted debt/EBITDA, increased to approximately 2.6x from 2.0x for the year ended 31 December 2012, driven largely by the rise in USD-denominated debt for refinancing and working capital needs.
"The increase in leverage is within our expectations for the rating, and we expect it to further rise to over 3.0x in 2014 as XL integrates Axis," says Dhruv.
"However, we estimate leverage will decline to approximately 2.5x-3.0x by 2015, which is appropriate for the rating level, and reflects a likely reduction in capex, particularly to expand its base stations, as well as the achievement of cost synergies associated with the acquisition of Axis," adds Dhruv.
Additionally, once it acquires Axis's telecommunication towers, XL may consider the outright sale and leaseback of surplus towers to pay down debt. Such a transaction would enhance XL's liquidity, but, given our standard lease adjustment, the company's leverage would remain unchanged.
The rise in USD-denominated debt led to an increase in XL's unhedged debt position to 48% of USD debt as of 31 December 2013 from 35% as of 30 September 2013. Management is cognizant of the associated forex risk and seems committed to increase its hedged position imminently.
Management has also reduced capex guidance to about IDR7 trillion for 2014, as compared to actual capex of IDR7.4 trillion for 2013 and IDR10.2 trillion for 2012. This reduction is in line with expectations, given XL aggressively built out its 3G network infrastructure in 2012-2013. The Axis acquisition will also result in capex savings, particularly spending to support its 2G network infrastructure.
On 5 February 2014, XL's shareholders approved the acquisition of Axis. XL expects to complete the acquisition by end-March 2014, subject to a final approval from Indonesia's Commission for the Supervision of Business Competition.
The rating outlook is stable, based on our expectation that XL will maintain its credit profile by reducing operating expenses and capex, whilst solidifying its market position following its acquisition of Axis.
Further upward pressure on the rating is limited, given the degree of competition in the Indonesian cellular market and the expected increase in leverage. We are also cognizant of emerging market risks which need to be incorporated into the rating.
Downward pressure could emerge should there be any material deterioration in XL's underlying credit strength, and which would arise from diminishing operating margins, weaker operating cash flow, or rising forex risk; all of which may be reflected in adjusted debt/EBITDA remaining consistently above 3.0x, or free cash flow/adjusted debt falling below 0%-5% on a sustained basis.
In addition, the one-notch uplift based on expected support from Axiata could be removed if Axiata's shareholding in XL falls below 50%, or if Axiata indicates that it is no longer a core asset for the group.