Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM4.90/share, which implies an FY20F EV/EBITDA of 5.5x – 1 standard deviation below its 3-year average of 6.2x.

• Axiata’s 80%-owned Ncell paid NPR23.4bil (US$194mil) to Nepal’s Large Taxpayers Office (LTO) in protest against its demand for outstanding capital gains tax (CGT) arising from the US$1.4bil sale in 2016 by TeliaSonera Norway Nepal Holdings AS to Axiata Investments (UK) Limited. The amount comprises the LTO’s demand of NPR22.4bil (US$185.5mil) and an additional interest of NPR990.25mil (US$8.5mil).

• Recall that the Nepali Supreme Court has ordered that the distribution of dividends and any sale of Ncell shares should not be granted until the tax obligation is satisfied. On 21 Nov 2019, the Supreme Court issued its full written judgment that held that Ncell is liable to pay NPR21.1bil (US$175mil) in CGT while the LTO issued its demand letter on 6 December 2019. Meanwhile, Ncell has already paid deposits of NPR23.6bil (RM843mil) to LTO for the CGT in 2017.

• Ncell and Axiata are currently appealing to the UK’s International Centre for the Settlement of Investment Disputes to overturn the Nepali Supreme Court’s ruling on the grounds that the transfer of shares occurred outside Nepal in a nonNepalese company and is not subject to CGT.

• However, we are doubtful that restitution for the sums already paid can be effected against the country’s legal and tax authorities even with a favourable ruling by the tribunal.

• Hence, we expect Axiata to make the RM837mil full provision for this settlement which will account for a massive 62% of its FY20F earnings and 3% of its current market cap. This will also raise Axiata’s FY20F net debt by 5% to RM18bil and elevate its net debt/EBITDA to 1.7x from 1.6x. As this one-off item will not affect normalised earnings, we maintain FY20F earnings.

• Even though Ncell is currently the mobile market leader in a duopoly which includes Nepal Telecom, higher consumption levies and intense ISP competition have caused its FY19 revenue to decrease 6% YoY from the impact of new consumption levies, which caused EBITDA to drop 10% YoY and core net profit to fall by 16% YoY.

• Given these regulatory and operational risks, we do not discount the possibility that the group may exit Nepal under the current regime. As Ncell made up 12% of and 24% Axiata’s FY19 EBITDA and earnings respectively as well as 13% of Axiata’s SOP, this could be a significant re-rating catalyst. Axiata’s FY20F EV/EBITDA of 5x (vs. Maxis’ 13x) remains attractive for a regional telco operator with good opportunities to monetise its overseas assets.

Source: AmInvest Research - 14 Apr 2020