Investment Highlights

• We maintain our HOLD call on Axiata Group (Axiata) pending further progress on the group’s proposed value-enhancing merger with Telenor Asia, based on an unchanged fair value of RM4.05/share, which is at a 25% holding company discount to our unchanged sum-of-parts-based fair value of RM5.40/share.

• This implies an FY19F EV/EBITDA of 5x, which is 2SDs below its 2-year average of 7x due to the group’s multiple overseas risk exposure.

• Following the analyst briefing yesterday, the salient points are as follows:

• Management was unable to provide guidance on the possible conditions or restrictions which the regulators may impose for the proposed merger with Telenor’s Asia operations, such as dual brand strategy which was adopted by XL following its acquisition of PT Axis Telekom Indonesia back in 2014. Together with the possibility that the merged entity may have to surrender parts of the spectrum which had been awarded to Celcom and Digi, we caution that the merged entity may not be able to fully capture the synergies, which management indicated could reach RM15–20bil over 5 years in present value from network efficiencies, cost avoidance, procurement optimisation and economies of scale.

• The US ban on Huawei products is not expected to impact the group’s capex rollout in the near term given that Huawei has built up inventories of US components, pending resolution of geopolitical trade tensions. This should also not have any bearing on the proposed merger with Telenor.

• Celcom’s postpaid subscriber QoQ decline of 10K, after 4 quarterly expansion last year, stemmed from a slowdown in handphone promotions in 4QFY18 and reduction in low margin legacy accounts. Hence, management views that the subscriber dip does not represent a trend for the current year.

• Celcom’s 1QFY19 revenue decline by 3.6% YoY stemmed from lower wholesale contribution from its roaming arrangement with TM together with a reduction in mobile termination rates. However, Celcom’s net profit fell 19% YoY to RM140mil mainly due to a one-off network LTE expansion cost of RM35mil, of which a portion may yet to materialise in 2QFY19.

• Overall, the group remains focused towards profitability and cash, with an emphasis on profit growth, opex/capex efficiencies, reprioritising investments with long payback, fund investments via strategic partnerships (such as Mitsui’s investment in Axiata Digital Services and accelerate industry consolidation and network modernisation.

• Axiata currently trades at a bargain FY19F EV/EBITDA of 6x vs. Maxis’ 12x amid potentially mitigated overseas risk exposure if the proposed merger with Telenor’s Asia operations is completed. Nevertheless, the government’s intention to reduce Khazanah Nasional’s holdings in government-linked companies currently casts shadows of a share overhang.

Source: AmInvest Research - 30 May 2019