XL Axiata (EXCL.IJ IDR 2.370 BUY.TP IDR 3.000) Potential FMC strategy acceleration and value unlocking from the merger scenario

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XL Axiata (EXCL IJ)

Potential FMC strategy acceleration and value unlocking from the merger scenario

XL may accelerate its FMC by acquiring the subs of LINK and rolling out 3m new homepasses upon obtaining funding at the associated co. level.
We see a merger scenario to potentially unlock XL’s unique value propositions.
We reiterate our Buy rating with an unchanged TP of Rp3,000 (based on our DCF, implying 4.9x 2024 EV/EBITDA).

XL’s FMC catalyst to be triggered by funding plans at Linknet.

Linknet (20%-owned by EXCL) is targeting to raise US$450-500mn from third party investors to fiberize its coverage and build new homepasses (HPs). If this materializes, we believe the funding will allow LINK to: a) decisively change course into becoming an Infra Co by executing its FTTH HPs rollout plan (pls see exh 2) and b) turn its ~750k First Media (FM) subscribers over to ServeCo XL Axiata. Based on this scenario, we may see a jump in XL’s fixed BB revenue (estimated at ~Rp3tr), which combined with associated HP financial leases, should add to the bottomline (initially ~10% margin, we estimate).

Broadening XL’s portfolio into new products and segments.

XL recently added new business classifications in its Articles of Association to build a services portfolio primarily in IPTV, AI, and Blockchain to grow its FMC and B2B segment. This should add to XL’s growth opportunities in the post 4G cycle, becoming an enticing vehicle for new ICT investments.

Unique value propositions to be potentially unlocked with a merger.

XL’s position in the current landscape makes it an attractive vehicle for merger. The arguments supporting this view are: a) a sturdy 58mn subs base with ~50% EBITDA margin, b) complimenting spectrum bands with FREN, c) FMC solid positioning and d) large ex-Java market to invest. In Dec23’s Axiata Analyst Day, Axiata responded positively when asked about merger talks with FREN. We project a non-cash deal will see XL and FREN shareholders owning ~70%/30% stakes in the merged Co (pls see exh.6). We see the possibility for FREN to balance the stakes by proposing to buy a stake in XL or making an injection into the merged Co.

Reiterate Buy rating on potential valuation upside.

We reiterate our Buy rating on EXCL with an unchanged TP of Rp3,000 (based on our latest DCF). We see potential upside from the acquisition of LINK subs and the merger scenario which shall drive EXCL’s re-rating to north of 5.5x to meet the midpoint in the valuation multiple gap between EXCL & FREN. Key risks include derailing merger negotiations, and lack of investor interest at the LINK level.

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