Investment Highlights

• We upgrade our call to BUY from HOLD on Axiata Group (Axiata) following the drastic drop in its share price following the announcement of the termination of merger negotiations with Telenor Asia.

• The current share price offers a 22% upside to our unchanged sum-of-parts-based fair value of RM5.00/share which implies an FY20F EV/EBITDA of 5.5x – 1SD deviation below its 3-year average of 6.2x. This also implies a 20% discount to our sum-of parts valuation of RM5.88/share.

• Singapore’s Straits Times reported that Hong Kong-based TCK Hutchison Holdings, backed by tycoon Victor Li, has made a preliminary approach to Axiata Group about a potential combination of their Indonesian telecommunications operations.

• CK Hutchison has informally expressed interest in exploring a combination of its Indonesian wireless business with Axiata's 66.5%-owned XL Axiata, which is currently the third largest mobile operator with a mostly prepaid-dominated subscriber base of 55mil in Indonesia, after Telkomsel and Indosat.

• In Hong Kong, CK Hutchison holds a 77% equity stake in HKlisted Hutchison Telecommunications Hong Kong Holdings Limited (HTHK), which has a market capitalisation of US$860mil – 34% of XL Axiata’s US$2.5bil.

• While HTHK provides mobile services in Hong Kong and Macau under 3 brands, CK Hutchison has equity interests in mobile operations in Indonesia, Vietnam and Sri Lanka, and is involved in businesses in Italy, the UK, Sweden, Denmark, Austria and Ireland.

• XL Axiata, which registered a 1HFY19 profit turnaround to IDR291bil from a previous loss of IDR49bil, is supported by a strong service revenue growth of 15%, driven by ex-Java expansion.

• Axiata has been introducing strategic investors to some of its businesses and advancing into new areas to revitalise growth.

• As deliberations are still at an early stage, the exact structure of any potential deal for XL Axiata, which accounts for 11% of the group’s SOP, is uncertain and may not lead to a transaction.

• We are not surprised by this development as the group is currently reprioritising its investments with long payback, as well as strategising and monetising existing investments for cash. Hence, there may be fresh interest in the listing of edotco in the medium term.

• Additionally, Axiata aims to accelerate structural changes through industry consolidation and network sharing.

• Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs. Maxis' 12x and its 3-year average of 6.2x.

Source: AmInvest Research - 11 Sept 2019