Investment Highlights

• We reiterate BUY on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM4.50/share, which reflects a neutral ESG rating of 3 stars. This implies an FY21F EV/EBITDA of 4.5x – 1 standard deviation below its 3-year average of 5.5x.

• Axiata’s share price rose 31 sen or 8% on Friday after the announcement by Axiata and Telenor that they are in advanced discussions to merge the telco operations of Celcom Axiata (Celcom) and Digi.Com.

• As highlighted in our Sector Report on 9 April, we understand that this could involve Digi acquiring Axiata's wholly-owned Celcom via a share swap together with a cash equalisation sum of RM2bil, of which RM1.7bil will come from new Digi debt and RM300mil from Telenor. Both Axiata and Telenor will have equal stakes of 33.1% each in the merged entity which will be called Celcom Digi, with the balance held by Digi's minority shareholders.

• Celcom Digi will emerge as the leading telecommunications service provider in Malaysia in terms of market capitalisation, revenue and profit, with proforma FY20 revenue of RM12.4bil, pre synergy EBITDA of RM5.7bil and 19mil customers, 71% above Maxis, the current market leader.

• Axiata could have the larger influence with Celcom Digi's chairman position to be occupied by Axiata's current CEO Datuk Izzaddin Idris while Celcom's current CEO Idham Nawawi will assume the same role in the merged entity, providing reassurance of continued local control. Meanwhile, Telenor will hold the vice chairman role via Jørgen C. Arentz Rostrup with Albern Murty as deputy CEO.

• Assuming no synergies nor opex savings, we estimate that the deconsolidation of Celcom’s earnings will cause Axiata’s FY22F EPS to decrease by 9%, partly offset by the contribution of the 33.1% associate contribution from Celcom Digi while EBITDA drop further by 22% (Exhibit 1).

• Assuming a 10% reduction in Celcom Digi’s opex, Axiata’s FY22F EPS will instead increase by 4%, while EBITDA decrease by 17%. Nevertheless, as Axiata’s FY22F net debt/EBITDA will improve from 1.1x to 0.8x–0.9x, we expect an improvement in the group’s EV/EBITDA valuations from 4.2x currently. Given the lower EBITDA from the deconsolidation of Celcom, we estimate that Axiata’s FY22F EV/EBITDA would need to rise to 5x (slightly below its 3-year average) to reach our fair value of RM4.50/share.

• For a regional telco operator aiming to be a high dividend-yielding stock with excellent opportunities to further monetise its assets and engage in multiple merger and acquisition activities, Axiata is trading at a bargain FY21F EV/EBITDA of 4x vs. Maxis' 12x.

Source: AmInvest Research - 12 Apr 2021