XL Axiata’s 2025 Outlook: 25% Profit Growth and Merger Synergies of Up to $400M

XL Axiata Analysis: Growth Prospects, Merger Insights, and Buy Recommendation

Date: Thursday, 23 January 2025

Broker: UOB Kay Hian

Overview of XL Axiata (EXCL IJ)

XL Axiata, a leading telecommunications service provider in Indonesia, offers cellular and mobile internet services as its primary business lines. With a market capitalization of Rp29,932 billion (US\$1,844.8 million) and 13,128.4 million shares issued, the company is strategically positioned in the Communication Services sector. Its major shareholder, Axiata Investments (Indonesia) Sdn. Bhd., holds a 66.3% stake.

The report highlights a strong “BUY” recommendation for XL Axiata with a target price of Rp3,200, reflecting a 40.3% upside from its current share price of Rp2,280. The analysis delves into the company’s financial outlook, merger updates, and growth potential.

Key Updates and Developments

Proposed Merger with Smartfren (FREN)

XL Axiata and Smartfren (FREN) have entered the definitive agreement phase for a proposed merger, forming a new entity named XLSmart Telecom Sejahtera (XLSmart). This merger positions XL Axiata as the surviving entity, while FREN will be dissolved. The combined pre-synergy enterprise value of the merged entity is estimated at Rp104 trillion (approximately US\$6.5 billion).

The proposed CEO for XLSmart, Rajeev Sethi, hails from Axiata. Sethi’s extensive industry experience includes leadership roles in companies such as Airtel Africa, Vodafone, and Telenor’s Grameenphone. The integration is expected to deliver annual pre-tax synergies of US\$300-400 million, supporting network efficiencies, marketing optimizations, and asset optimization efforts.

Additionally, Axiata Group stands to receive up to US\$475 million from the merger, with US\$400 million paid at closing and the remaining US\$75 million contingent on certain conditions.

Seasonality and Revenue Growth Projections

The Eid al-Fitr festive season in 1Q25 is anticipated to positively impact XL Axiata’s performance. Scheduled earlier in 2025 (31 March to 1 April) compared to 2024 (9-10 April), the seasonality effect is expected to boost revenues. Excluding merger effects, XL Axiata’s revenue is projected to grow by 7% year-on-year (yoy) in 2025.

Financial Highlights

Strong Net Income Growth in 2025

XL Axiata’s net profit after tax (NPAT) is forecasted to increase by 25% yoy in 2025, driven by growth in data traffic and an expanding fixed broadband subscriber base. The net margin is expected to improve to 5.8% in 2025, up from 4.9% in 2024. The report also anticipates an EBITDA of Rp18,136 billion in 2025, representing a 5.3% yoy growth.

Key Financial Metrics (2023-2026)

Revenue: Rp36,831 billion in 2025, up from Rp34,552 billion in 2024.
Net Profit (Adjusted): Rp2,031 billion in 2025, growing to Rp2,293 billion in 2026.
EPS: Rp154.7 in 2025, rising to Rp174.6 in 2026.
ROE: 7.6% in 2025, improving to 8.2% in 2026.
Net Debt-to-Equity Ratio: 25.4% in 2025, declining to 22.6% in 2026.

These forecasts underline the company’s robust financial health and growth trajectory.

Valuation and Recommendation

UOB Kay Hian maintains a “BUY” recommendation for XL Axiata with a target price of Rp3,200. This valuation is based on an EV/EBITDA multiple of 4.8x, which aligns with the historical mean (2017-2023) excluding the COVID-19 pandemic period. The stock currently trades at a forward EV/EBITDA of 4.1x for 2025, presenting an attractive investment opportunity.

Potential Risks

While the outlook remains optimistic, the report identifies several downside risks, including:

Increased competition in the telecommunications sector.
Worsening macroeconomic conditions.
Higher-than-expected operational costs, including spectrum and interest expenses.
Unfavorable regulatory changes.
Underperformance relative to 2025 guidance.

These risks could potentially impact the company’s financial performance and market valuation.

Conclusion

XL Axiata is well-positioned to deliver strong growth in 2025, driven by its core business expansion, favorable seasonality, and the anticipated synergies from its merger with Smartfren. The company’s robust financial metrics and attractive valuation underscore its potential as a compelling investment opportunity. With a “BUY” recommendation and a target price of Rp3,200, XL Axiata is a stock to watch for investors seeking exposure in the Indonesian telecommunications sector.