Investment Highlights

• Axiata and Digi.Com yesterday confirmed media reports of discussions for a proposed merger of most of Axiata’s and Norwaybased Telenor Group’s Asian operations which would lead to an entity with the largest telecommunication revenue in Southeast Asia (See Exhibit 21). Recall that Telenor holds a 49% equity stake in Digi.Com.

• Axiata will end up with a 43.5% effective stake in the merged entity while Telenor holds the remaining 56.5% stake. While an agreement will only be expected to be signed in 3Q2019 after a due diligence exercise, the parties’ intention is to list the merged entity in Malaysia and another international stock exchange within the next few years. Although the details have not been revealed at this stage, we expect Digi.Com to acquire the selected operations from both Axiata and Telenor via a noncash share issuance while Axiata will retain 80% stake in Ncell, 91.6% stake in Robi and 8% investment in Vodafone Idea.

• Contrary to The Edge Financial Daily report yesterday, Axiata’s operations which will be involved in the merger include its 80% stake in Nepal-based NCell. However, this excludes Robi, the second largest mobile operator in Bangladesh, as its inclusion will lead to an unacceptably huge combined market share with the largest player, Grameenphone, of which 55.8% is held by Telenor. Also excluded from the merger will be the group’s 90%-owned Axiata Digital Services and its 8% investment stake in Vodafone Idea.

• Based on FY18 results, the merged entity registered revenue of RM50bil, EBITDA of RM20bil and net profit of RM4bil, with 300mil customers in 9 countries of which the group will be ranked as the largest player in 6 nations – Malaysia, Bangladesh, Sri Lanka, Nepal, Myanmar and Cambodia, second largest in Pakistan and Indonesia, and third largest in Thailand. The entity would also be the 4th largest tower company with 50-60K towers which could mean higher valuations for a future listing exercise.

• In Malaysia, the merged revenue of RM14mil will mean the largest telecommunication market share (including TM and Time dotCom) of 35% and a dominant mobile share (including U Mobile) of 53%. Its combined subscriber base of 20.7mil translates to a commanding market share of 55%.

• We estimate that the merged entity’s FY19F net debt/EBITDA could reach 1.3x vs. Axiata’s 1.6x currently, given Digi’s much lower 0.6x. This could provide additional financial headroom to invest in new growth areas such as enterprise and home fixed broadband services.

• The entity’s combined US$6bil capex could be optimised while procurement synergies could lead to lower overall costs. Management indicated that the merged entity will enjoy 5-year synergies up to RM15-20bil in present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale.

• While this deal is positive for both Axiata and Digi, we expect the potential synergies and cost savings to have a higher boost to Axiata, which currently trades at an EV/EBITDA of only 5x, less than half of Digi’s 12x. Additionally, the merged entity’s expanded financial leverage comes from Digi’s low gearing which could subsequently impact the merged entity’s dividend policy.

• As we highlighted yesterday, this deal will 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. Additionally, with Telenor's proven track record and joint management role, we expect a narrowing of Axiata's discount to its SOP given the reduced exposure to overseas assets which bear higher risk.

• Nevertheless, we are uncertain if the Malaysian Communications and Multimedia Commission and current political regime would approve this proposal given that a merger would reduce the level of competition at the expense of consumers’ choice and pricing alternatives. We reiterate our view that such an extensive restructuring exercise could be hindered by the respective country’s regulatory oversight.

• Maintain NEUTRAL call given the continued intense competition in both the mobile and fixed broadband markets. We have HOLD calls on Axiata, TM and Digi while Maxis is UNDERWEIGHT due to its premium valuations despite its FY19F guidance for an EBITDA decline amid additional capex for fiberised solutions, digitalisation and productivity capabilities.

Source: AmInvest Research - 7 May 2019