Investment Highlights

• We maintain our HOLD call on Axiata Group (Axiata) with a higher fair value of RM4.00/share, which incorporates a 25% holding company discount to our sum-of-parts-based fair value of RM5.33/share. This implies an FY19F EV/EBITDA of 5x, 2SDs below its 2-year average of 7x.

• The Edge Financial Daily reported that Axiata and Norway-based Telenor Group, which holds a 49% equity stake in Digi.Com, have appointed foreign investment banks to advise on the merger of their operations in Asia, excluding Axiata’s operations in India and Nepal.

• Both companies have operations in Malaysia, Thailand, Myanmar, Bangladesh and Pakistan. In countries where Telenor does not have a presence, Axiata also operates in India, Sri Lanka, Nepal, Cambodia and Indonesia.

• The report indicates that the group’s 80% stake in Nepal-based NCell is not being discussed probably due to the baffling NPR39bil (RM1.5bil) capital gains tax that the group is required to pay for the profit earned by TeliaSonera Norway Nepal Holdings from its sale to Axiata in December 2015.

• Also, Telenor does not seem to be interested in the group’s 8% stake in India-based Vodafone Idea, which is still loss making at this stage due to the intense competition from Reliance Jio.

• Based on FY18 results, we estimate that Axiata’s operations, which could be involved in this merger, could reach RM23.8bil in revenue, RM8.5bil in EBITDA and RM1.2bil in normalized profit. Likewise in Asia, Telenor’s FY18 revenue was RM28bil, EBITDA RM13bil and net profit RM5bil. Hence, we expect Telenor to have a majority stake in the merged entities given its larger EBITDA and earnings base.

• Overall, we would be positive if this deal materializes as this could reduce the number of competitors, effectively enabling the merged entities to leapfrog to top positions in terms of market share in countries which are involved in the merger. We also expect significant synergies and economies of scale given the elimination of resource duplication and operational redundancies.

• Additionally, with Telenor’s proven track record and joint management role, we expect Axiata’s discount to its SOP to be narrowed given the reduced exposure to overseas assets which bear higher risk.

• Nevertheless, such an extensive restructuring exercise could be hindered by each country’s regulatory oversight, bearing in mind the strategic security and telecommunication issues which will be raised.

• While pending further clarity from an analyst briefing later today, Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs. Maxis’ 13x, amid intense mobile competition 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 - 6 May 2019