In this note, we reiterate our Buy call on the stock following the recent announcement that XL has entered into *business transfer agreement* with LinkNet (LINK IJ, Not rated). Under the agreement, XL will acquire LINK’s B2C Fixed Broadband (FBB) businesses, where it has approximately 750,000 connected home broadband (FTTH / fibre-to-the-home) customers. In addition, LINK will also transfer critical assets for the FTTH business, which include its Broadband Network Gateway (BNG), software and applications owned and/or developed by LINK related to FTTH, as well as devices installed at customers’ premises. As part of the agreement, LINK has agreed to a Master Lease Agreement that would be valid for 10 years (and can be extended for 5 additional years), including a lease-back to EXCL relevant passive infrastructures including FTTH networks. Both parties agree to a monthly lease fee for FTTH of IDR120,000 per Home Connect if the connection is less than 25% of the homes passed and IDR80,000 per Home Connect if the connection is greater than 25% of homes passed. Total acquisition cost would be IDR1.875tn. Refer to the Transfer Agreement LINK for more details.
In our view, the proposed transaction should bring greater synergies (and more integrated) for the company’s future business strategies, particularly on Fixed-Mobile-Convergence (FMC). We also think that this strategy is an integral part for the co’s planned merger with SmartFren (FREN IJ, Not rated) as this would provide cleaner structure. And thus, we think this should help pave ways for clearer merger process.
We have prepared pro forma assessments on the proposed transaction. We have two scenarios whereby we have assumed lease-back rates of 1) IDR120,000 per Home Connect per month and 2) IDR80,000 (Fig. 1). We think over time, EXCL should be able to continue to grow its FBB business. In partincular, if the planned merger is successfully executed, EXCL could potentially deploy 5G-based fixed broadband services utilizing FREN’s TDD spectrum. Under scenario 2 above, we could see positive valuation accretion, whereby EV/EBITDA could decline to below 4.0x.
At the current price, we see limited downside risks on EXCL. As such, we reiterate our Buy call on the stock.
Valuations and risks
We derive our TP of IDR2,600 based on DCF analysis, using a risk-free rate of 6.2%, an equity risk premium of 7.4%, and a terminal growth rate of 2.5%. This results in a WACC of 9.4%. At our TP, the stock would trade at 2024F EV/EBITDA of 4.7x (compared to 4.1x at the current price). Downside risks include adverse macro conditions, lower customer spending, less service price hikes leading to lower data prices, irrational competition behavior, and/or higher opex.
Fig. 1: EXCL x FBB acquisition
As of 1H24 Data
EXCL
Serve Co
EXCL Proforma w FBB Fibre Lease IDR120K
EXCL Proforma w FBB Fibre Lease IDR80K
EXCL Proforma w synergies (FBB margin @25%)
LINK
EXCL FBB Acquisition
Share price IDR (16 Aug 2024)
2,240
1,400
2,240
Number of shares
13,128
13,128
13,128
13,128
2,863
550
Net debt (incl lease liab)
44,053
45,928
45,928
45,928
7,631
6,709
Market cap
29,408
1,875
29,408
29,408
29,408
4,008
1,233
EV
73,461
1,875
75,336
75,336
75,336
11,639
7,942
Revenue
17,052
1,394
18,445
18,445
18,445
1,833
EBITDA
8,958
1,201
9,079
9,560
9,306
1,579
1,579
Annualised Ebitda
17,916
2,402
18,157
19,119
18,612
2,106
2,106
Assets
86,589
5,731
92,321
92,321
92,321
13390.893
Profits
1,025
1,107
1,017
1,392
1,100
-282.3
Annualised profits
2,050
2,215
2,034
2,784
2,200
Implied EV / EBITDA x
4.10
0.78
4.15
3.94
4.05
5.53
3.77
Implied PER
14.35
0.85
14.46
10.56
13.37
Source: Company data, Verdhana research
INVESTMENT RATINGS A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general.
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