Investment Highlights

• We downgrade our call on Axiata Group (Axiata) to HOLD from BUY with a lower fair value of RM3.86/share (from an earlier RM5.32/share) by incorporating a 25% holding company discount to our lowered sum-of-parts-based fair value of RM5.14/share. This implies a FY19F EV/EBITDA of 5x, which is 2 SD below its 2-year average of 7x.

• Our lower SOP stems from heightened overseas regulatory risks together with the RM1.6bil (NR45bil) additional capital gains tax (CGT) arising from the US$1.4bil acquisition of an 80% stake in Ncell from TeliaSonera in December 2015 that Axiata has to pay to Nepal’s Large Taxpayers’ Office (LTO).

• The Himalayan reported that Nepal’s apex Supreme Court has issued a final verdict that Ncell’s buyer, Axiata has to pay for the CGT even though the vendor, Sweden-based TeliaSonera enjoyed the profit from the sale.

• While we view the court verdict as unreasonable, Axiata’s regulatory risk profile has nevertheless worsened as the group may not have any further legal recourse except pursue an uncertain claim from Telia.

• Meanwhile, Axiata has not received any written confirmation on the court decision nor the LTO demand.

• According to the LTO, the CGT of NR61bil (RM2.2bil) could reach NPR66bil (RM2.3bil) if late fees are included. As Ncell has already paid tax instalments totalling Rs 21bil, Ncell and Axiata will bear only NR45bil (RM1.6bil).

• If the group were to make a provision this year, Axiata’s FY19F net profit of RM1.3bil could reverse to a loss of RM325mil.

• However, the LTO will require that Axiata deposit the entire Rs66bil first before deducting Rs21bil upon a formal application. Hence, we estimate that this could raise Axiata’s FY19F net debt/EBITDA from 1.6x to 1.8x.

• Besides this huge potential provision, we expect some disappointments from non-core impairments of nonproductive/end-of-life assets due to aggressive modernisation, such as largely unutilised 2G equipment and legacy ICT systems for the group’s FY18 results, which is scheduled to be announced on 22 February.

• Even though Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs Maxis’ 11x, the group’s deteriorating overseas risk profile amid intense mobile completion both locally and regionally could limit any medium-term share price upside.

• Additionally, the government’s intention to reduce Khazanah Nasional’s holdings in GLC-linked companies currently cast shadows of a share overhang.

Source: AmInvest Research - 7 Feb 2019