Investment Highlights

• We maintain HOLD on Axiata Group (Axiata) with an unchanged SOP-based fair value (FV) of RM2.95/share. This implies FY24F EV/EBITDA of 6.3x, which is the 5-year median. We have a neutral 3-star ESG rating for Axiata.

• Axiata’s 82%-owned Dialog has signed a definitive agreement with Bharti Airtel to combine operations in Sri Lanka. Dialog Axiata will acquire 100% of Airtel Lanka's issued shares. In exchange, Bharti Airtel will receive 953bi ordinary voting shares, accounting for 10.4% stake in Dialog Axiata through a share swap. The transaction is pending approval from Dialog's shareholders, clearance from the Colombo Stock Exchange and completion of other legal and regulatory procedures.

• Discussions on the merger between Bharti Airtel and Dialog Axiata have been around since 2016. The rationale for merger during the time was due to the establishment of minimum mobile tariff by Sri Lankan government. The regulation has restricted the ability of smaller mobile players like Airtel Lanka to compete with Dialog, a larger telecom player in pricing and market share.

• Talks on the merger resurfaced in 2018 and 2022. Finally, in 2024, the plan came to fruition as The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) granted approval for the merger, highlighting its commitment to boost telecommunications services throughout Sri Lanka. The target to complete the merger is within 15 months, with expected completion in mid-year 2025. Therefore, there wil be no material impact to Axiata’s FY24 consolidated financial statement.

• Dialog Axiata is Sri Lanka’s largest mobile network operator boasting a 57% market share, with 17mil mobile subscribers (vs. Mobitel 8mil subs and Hutchinson 3.5mil subs). The merger is expected to propel Dialog’s market share to 60%, as mobile subs base widens to 20mil after adding Airtel’s 3mil subs.

• We estimate the combined revenue of Dialog-Airtel will grow by 7% to LKR200bil in FY25F, on the assumption of flat revenue growth for Airtel, achieving similar to LKR13bi revenue in FY23.

• In 2023, Airtel Lanka’s reported losses of INR3.5bi (LKR15.5bil) is already reflected in its parent company, Bharti Airtel's consolidated net income of INR83bil.

• Meanwhile, Dialog’s reported profit after tax (PAT) of LKR20.1bil in FY23, reversed from losses of LKR33.3bil in FY22. Share of Dialog’s profit to Axiata bottom-line is 20%, translating to RM110mil out of RM542mil normalised PAT.

• We think the acquisition of the loss-making Airtel will affect Dialog’s earnings, dragging its bottom line by 70-75% in 2025F before gradually breaking-even via cost savings from lower administrative cost and integrated network cost. Nevertheless, the impact may be partly cushioned by continuous cost rescaling initiative that had pared down Dialog’s operating cost by 2%-pp in FY23.

• We think the impact to Axiata’s net profit is negligible, given the potential profit increase contributed by other emerging frontier market like Indonesia and Philippines. We estimate Axiata’s FY25F consolidated net debt to EBITDA to marginally increase 3.5x to 3.6x. We do not make changes to our forecast pending shareholders approval for the merger exercise.

• We are positive on the Dialog-Airtel merger solidifying Dialog’s leading position in the market. Additionally, Dialog will have wider coverage by integrating Airtel’s 2G & 4G sites in major towns across Sri Lanka. The combined entities of Dialog and Airtel hold a total spectrum ownership of 215 MHz, which will account for 52% of the spectrum allocated in the mobile industry. In contrast, Mobitel owns 105 MHz, representing 26%. The merger will create synergies from spectrum consolidation and overlapping sites elimination. Plus, the dismantled equipment will be redeployed to further improve coverage and enhance consumer experience. As in mergers of telco companies across the region, we expect the merged company to surrender part of the spectrum bands to the government.

• Looking forward, we are cautious on Axiata’s prospects. The group may be affected by digital banking losses and higher interest expense arising from additional debt financing for Link Net’s fibre rollouts.

• We believe that Axiata is fairly valued due to near-term earnings risks, currently trading at 6.1x EV/EBITDA, at parity to its 5-year historical mean.

Source: AmInvest Research - 19 Apr 2024