Investment Highlights

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

• Axiata’s 80%-owned Ncell has petitioned against Nepal’s Large Taxpayer Office’s (LTPO) assessment of outstanding capital gains tax (CGT) of NPR39bil (RM1.5bil).

• The legal grounds for this stem from the LTPO’s earlier letter in June 2017 that had acknowledged that Ncell has fully complied with its CGT responsibilities upon paying 2 advance deposits of NPR13.6bil (RM505mil).

• The writ petition was filed and accepted by Nepal’s Supreme Court (SC) against the LTPO, Inland Revenue Department and Ministry of Finance.

• Recall that Axiata has received a letter from Nepal’s LPTO last week confirming that the outstanding CGT should be deposited by yesterday.

• This arose from the order of Nepal’s Supreme Court that the CGT arising from the sale of an 80% equity stake in Ncell for US$1.4bil by TeliaSonera Norway Nepal Holdings in December 2015 should be borne by Ncell and the buyer Axiata, following a public interest litigation filed by a group of Nepali nationals.

• Additionally, the Nepali Supreme Court has ordered that the distribution of dividends and any sale of Ncell shares should not be granted until the tax obligation is satisfied.

• According to the Himalayan Times, the CGT payable is NPR62.6bil, of which Axiata has already paid instalments of NPR23.3bil, including late interest charges.

• We estimate that this could raise Axiata’s FY19F net debt/EBITDA to 1.7x from 1.6x. If the group were to make a provision, Axiata’s FY19F net profit of RM1.3bil could reverse to a loss of RM200mil.

• Given the baffling Supreme Court verdict, we remain uncertain of the likelihood of success for Ncell’s appeal amid the local political and regulatory regime. Hence, Axiata’s regulatory risk profile remains elevated at this stage.

• 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 - 23 Apr 2019