Investment Highlights

• Telenor-Axiata relook. The Star reported over the weekend that negotiations have resumed for a merger between Norway’s Telenor ASA, which has a 49% stake in Digi.Com, and Axiata Group that were discontinued in 2019. Newspaper sources indicated previously that the failure in the earlier attempt stemmed from complexities in the proposed mega-merger such as potential job losses from right-sizing initiatives and the non-competitiveness of worried local vendors for Celcom.

Nevertheless, the parties did not rule out a future deal as their CEOS still positively viewed the value-accretive strategic rationale of the deal. Additionally, as PT Indosat Tbk and PT Hutchison 3 Indonesia are currently proposing a merger, there is a likelihood that the Indonesian regulator could now be favourable to the Telenor-Axiata consolidation as well.

• Driven by intense competition and 5G. The renewed interest in a merger deal between Digi and Axiata’s wholly-owned Celcom Axiata comes after the announcement that a wholly government-owned special purpose unit will be building and owning 5G infrastructure that will be leased out to telecom operators to use and deliver their services. As celcos will have access to the same 5G infrastructure, operators are considering consolidation for economies of scale and collaboration between different geographical locations amid an intensely competitive landscape to deliver on improved marketing, customer support and value-added services to the end-user.

Recall that U Mobile's RM30 prepaid package, which offers unlimited data and 6GB hotspot with speed cap of 6Mbps together with RM5/month top-up for unlimited calls, remains the frontline in the mobile wars. Digi’s current entry-level plans for prepaid packages at RM15/month and postpaid at RM40/month are gaining traction even with limited data quotas. In Peninsular Malaysia, Celcom and Digi have selectively targeted market segments in the Klang Valley for their fibre-to-home packages bundled with cellular plans.

• No surprise. This development is not a surprise as we have highlighted in our Sector Update on 11 August last year. The multiple synergistic benefits for consolidation are: 1) offering a comprehensive suite of cellular and fibre broadband services to provide bundling promotions and back-up support service support, especially for critical enterprise solutions; 2) revitalising top-line growth by lowering competitors, re-establishing monopolies or offering a dual-branding strategy; 3) intensifying cost efficiencies by reducing overheads given redundancies in the head office, marketing and service stations; 4) generating economies of scale from bulk purchasing and streamlining of cost centres; and 5) improving investment and credit rating profiles from enlarged market capitalisation and stronger balance sheets.

• Largest cellular operator in multiple jurisdictions. If the negotiations are successful, the merged entity would emerge as the largest cellular operator in Malaysia, Nepal, Cambodia, Myanmar, Sri Lanka and Bangladesh. 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%.

It would be ranked second in Indonesia and Pakistan while being the third largest player 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. However, Robi, the second largest mobile operator in Bangladesh, was excluded as its inclusion which will lead to an unacceptably huge combined market share with the largest player, Grameenphone, of which 55.8% is held by Telenor.
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The entity could boast a pro-forma revenue of over US$12bil (RM50bil) and EBITDA of over US$4.8bil (RM20bil) with operations in 9 countries servicing 300mil customers. By adopting the earlier swap arrangements, Telenor could be the majority shareholder of the merged entity with an equity stake of 56.5% while Axiata could own 43.5%. All in, this could directly reduce the number of competitors, effectively enabling the merged entity to leapfrog to the top position in terms of market share in each country involved in the merger.

• Synergies could raise DCF by 26%–34%. With an enlarged market capitalisation, the capability to raise additional funding could provide the edge 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 earlier 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. These synergies could mean a DCF enhancement of 26%–34% from the combined market capitalisation of both companies currently.

• Maintain OVERWEIGHT with BUY calls for TM, which has shown significant cost improvements together with more compelling dividend yields, and Axiata, which offers bargain EV/EBITDA valuations with multiple opportunities for monetisation as the group aims for higher dividend payout policies. These valuations are even more compelling given their 3–4-star rating for ESG compliance on the FTSE4GOOD Index.

Source: AmInvest Research - 8 Mar 2021