Investment Highlights

• We maintain our HOLD call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM3.86/share, which is at a 25% holding company discount to our sum-ofparts of RM5.14/share. This implies an FY19F EV/EBITDA of 5x, 2 SDs below its 3-year average of 7x.

• As we have guided in our update on 27 September 2018, Axiata has accepted the offer by the special purpose vehicle called Konnectivity Pte Ltd held by Keppel Corporation and Singapore Press Holdings to sell its 29.7%-owned equity stake in SGX-listed M1 at S$2.06/share following Konnectivity’s voluntary general offer (GO) for the outstanding M1 shares.

• The one-off gains of RM126.5mil from the disposal translate to 10% of FY19F earnings. However, given M1’s lower FY19F PE of 17x vs. Axiata’s 24x, we estimate a mild 3% earnings erosion for FY19F–FY20F core earnings, net of interest cost savings at 5%. Hence, as indicated in our earlier update, we are neutral on this development.

• Recall that Axiata inherited its stake in M1 when Telekom Malaysia acquired an initial 17.7% stake for S$377mil in August 2005 and subsequently enlarged its stake to 29.7%. Telekom later demerged from Axiata in 2008.

• While Axiata has indicated satisfaction in its M1 investment in the past, we had highlighted the intense competition by the fourth Singapore telco operator TPG Telecom and additional substantive capex requirements to improve network quality and connectivity towards 4G and beyond would likely to lead to this decision.

• Additionally, the group has indicated interest in focusing on core investment holdings in which Axiata has management control with majority shareholding (in contrast with its current associate stake in M1) and in markets where it can secure or establish the top 2 position.

• We expect the cash proceeds of S$546.7mil (RM1.6bil) to cause Axiata’s FY19F net debt/EBITDA to drop from 1.6x to 1.4x. Hence, the sale will provide the group additional financial resources to repay the contentious CGT addition of RM1.6bil for Nepal’s NCELL acquisition, redeploy to more strategically focused operations, in particular the modernization of IT and network infrastructure and digitalization initiatives.

• Even though Axiata currently trades at a bargain FY18F EV/EBITDA of 5x, way below its Maxis’ 13x, the group’s likely weak 4QFY18 results announcement on 22 February from further year-end asset impairments amid deteriorating overseas risk profile from Nepal’s additional capital gains tax charge on NCELL acquisition and intense competition from both local and overseas mobile operations constrain upside momentum. Additionally, the government’s intention to reduce Khazanah Nasional’s GLC holdings casts possibilities of a share overhang over the medium term.

Source: AmInvest Research - 18 Feb 2019