Axiata Group (Axiata) has officially announced the disposal of its mobile business in Nepal, following a surprise move with the classification of Ncell as discontinued operations in the recent 3QFY23 results. The shares of Reynolds Holdings, that owns an 80% equity stake in Ncell, were sold to London-based Spectrlite UK for a fixed consideration of USD50m (or RM233.6m) as well as conditional consideration based on the future performance of Ncell. Although we think this potential exit is positive for Axiata given the removal of further operational and regulatory risks in Nepal, it is testament to our concerns over Axiata’s aggressive investment in high-risk frontier markets. We reiterate our Underperform rating on Axiata with an unchanged RM2.00 TP as we remain wary of its operations in other frontier markets such as Myanmar, Indonesia and the Philippines.

• Exiting Nepal mobile market. Axiata holds an 80% stake of Ncell, which was acquired in December 2015 for USD1.37bn (or RM5.88bn). Since the acquisition, the journey in Nepal has not been smooth-sailing due to Axiata’s dispute with Nepal’s Large Taxpayers Office (LTPO) over issues with outstanding capital gain tax (CGT). Between 2016 and 2020, Ncell had settled about USD421.9m or RM1.8bn in CGT but despite this, Ncell was further assessed by the LTPO in January 2021 for a sum of approximately USD433.6m (or RM2bn). 
  Operationally, Ncell has been adversely impacted by structural changes in the mobile industry, leading to a declining revenue and profit since its acquisition in 2015. Ncell’s EBITDA fell 42% while net profit was down 75% between 2015 and June 2023. Thus far, Axiata has received dividends of RM2.2bn from Ncell since 2016. Although we think this potential exit is positive for Axiata given the removal of further operational and regulatory risks in Nepal, it is testament to our concerns regarding its aggressive investment in high-risk frontier markets.

• Details of the disposal agreement. Axiata sold Ncell to Spectrlite UK, which is wholly-owned by Satish Lal Acharya, a Nepali who has invested in the telecom sector in Nepal and other countries for over two decades. The total consideration for the transaction is split between a fixed sum of USD50m to be paid over 54 months (USD5m within 6 months after completion and USD45m within 48 months after completion) and a conditional consideration that is contingent upon future business performance and future distributions declared by Ncell until 2029. Both considerations will be paid in cash.

• Financial impact. Taking into account the present value of the USD50m fixed consideration and the carrying value of Ncell, Axiata will suffer a massive impairment of RM1.9bn, leading to a 19% decline in EPS. However, this impact would be classified as non-operating and hence, core earnings estimates remain unchanged. Nevertheless, we note that for 9MFY23, Axiata had made a total impairment of asset for Ncell amounting to RM1.87bn, which we believe may have incorporated the impact of this transaction. We make no changes to our earnings forecasts for now.

Source: PublicInvest Research - 4 Dec 2023