Investment Highlights

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

• Following our update on 7 February, Axiata today has finally confirmed receiving the Nepali Supreme Court’s full written order regarding its liability to pay the capital gains tax (CGT) arising from the sale of an 80% equity stake in Ncell by TeliaSonera Norway Nepal Holdings.

• This follows the court’s oral order dated 6 Feb 2019 on a public interest litigation filed by a group of Nepali nationals which sought various orders from the court. The order affirms that Nepal’s Large Taxpayers Office (LTO) should determine the outstanding tax amount to be paid in relation to the transaction within 3 months from the date of receipt of the order, and that the responsibility to pay tax lies with Ncell and Axiata.

• Additionally, distribution of dividends and any sale of Ncell shares should not be granted until the tax obligation is satisfied. Axiata and Ncell are reviewing the decision of the Supreme Court.

• Since the news broke out in February this year, our SOP has included heightened overseas regulatory risks together with the RM1.7bil (NR45bil) additional CGT arising from the US$1.4bil acquisition of the Ncell stake from TeliaSonera in December 2015 that Axiata has to pay to LTO.

• Recall that Axiata has to pay for the CGT even though the vendor, Sweden-based TeliaSonera, enjoyed the profit from the sale. While we maintain the view that the court verdict is unreasonable, Axiata’s regulatory risk profile has worsened as the group may not have any further legal recourse except pursue an uncertain claim from Telia.

• According to the LTO in February this year, the CGT of NR61bil (RM2.3bil) could reach NR66bil (RM2.4bil) if late fees are included. As Ncell has already paid tax instalments totalling NR21bil, Ncell and Axiata will bear only NR45bil (RM1.7bil). If the group were to make a provision this year, Axiata’s FY19F net profit of RM1.3bil could reverse to a loss of RM400mil.

• However, the LTO will require that Axiata deposit the entire NR66bil first before deducting NR21bil upon a formal application. Hence, we estimate that this could raise Axiata’s FY19F net debt/EBITDA from 1.6x to 1.8x.

• Even though Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs. Maxis’ 12x, 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 casts shadows of a share overhang.

Source: AmInvest Research - 11 Apr 2019