Investment Highlights

• Telenor Asia-Axiata back in the spotlight? Bloomberg reported that Khazanah Nasional has revived negotiations with Telenor ASA, which owns a 49% equity stake in Digi.Com, for a potential deal involving Axiata Group. Recall that the proposed merger between Axiata Group and Telenor Asia for their telecommunications and infrastructural assets in Asia were aborted in September 2019 after 4 months of due diligence due to undisclosed complexities in the proposed megamerger. Prime Minister Tun Dr Mahathir Mohamad had then queried on the impact on the country’s employment from redundancies and Telenor’s majority stake in the combined entity. However, the parties did not rule out a future deal given the underlying strategic rationale.
• The earlier aborted merger proposal was estimated to have pro-forma revenue of over US$12bil (RM50bil) and EBITDA of over US$4.8bil (RM20bil) with operations in 9 countries servicing 300mil customers. Subject to adjustments, Telenor would have been the majority shareholder of the merged entity with an equity stake of 56.5% while Axiata could own 43.5%. The merged entity would have emerged as the largest cellular operator in Malaysia, Nepal, Cambodia, Myanmar, Sri Lanka and Bangladesh. It would have been ranked second in Indonesia and Pakistan while being the third largest player in Thailand
• Multiple scenarios for a minority stake for Telenor. According Bloomberg, Khazanah and Telenor are in the early stages of exploring several possible scenarios including Telenor buying part of the sovereign wealth fund’s 38% equity stake in Axiata and a subsequent merger of Axiata and Telenor’s telecommunications tower assets or consolidation in certain markets. Another option could include a combination and eventual listing of the two carriers’ overseas operations. As these are still at exploratory stages, any merger proposal, which could yet be derailed, has yet to be mutually agreed on by both parties.

• What has changed? In our view, the increasingly importance of collaboration and pooling of resources amongst key players against the backdrop of rising 5G capex rollouts and intense cellular competition currently amid the government’s policy to expand broadband connectivity to rural and remote regions have highlighted the imperative for consolidation in the telco sector. Additionally, acquiring a minority stake could still allow Telenor to strengthen its presence in Asia while easing political concerns in Malaysia. As we had indicated in our past updates, the RM7–8bil investment for 5G deployment in Malaysia indicated by the National 5G Task Force of the Malaysian Communications and Multimedia Commission (MCMC) is likely for targeted sites for high data usage given that our channel checks with industry sources have indicated that the capex per square km could be 10x higher than 4G for selected locations. Over the past 5–6 years, we estimate that 4G capex spent by telcos has already surpassed RM15bil to date on a nationwide coverage programme. Besides 5G spending, additional capex for 4G is still required given that only 40% of mobile towers in the country are fiberised, which has resulted in sub-optimal speeds and connectivity for 4G services. Evidently, a substantively higher proportion of fiberised mobile towers is needed to deploy 5G services. However, the MCMC has highlighted that telcos’ capex spending trend has been declining, currently below the industry average. Amongst the 3 main mobile operators, Digi’s capex fell the most by 11% in FY18, Celcom by 6% and Maxis by 5%.

• Potential rerating catalyst if merger materialises, given the synergies arising from consolidation while mitigating competition amongst the cellular operators. We note that the share prices of telco stocks have appreciated recently due to the rising trend of collaboration amongst the potential 5G mobile operators. However, pending further developments on this front, we maintain our NEUTRAL outlook on the sector for now given the still substantive 5G capex requirements against the backdrop of government-targeted fiberised ARPU reductions under the National Fiberisation and Connectivity Plan (NFCP). Our only BUY currently is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

• Sector can be de-rated on resumption of revenue declines against the backdrop of escalated mobile price war intensification and sharp drops in fixed broadband prices next year, driven by NFCP prerogatives. We are also cautious on possibilities of higher-than-expected increase in operating and capital cost requirements as operators need to further upgrade their network infrastructure for 5G rollouts.

Source: AmInvest Research - 20 Jan 2020