Investment Highlights

• We maintained our BUY call on Axiata Group (Axiata) with unchanged forecasts and sum-of-parts-based fair value of 6.30/share, on expectations of a value-enhancing re-merger with TM which could reduce the valuation differential with its peers.

• We are neutral on Axiata’s sale of potentially up to 20% of its current stake of 92.5% in Cambodia-based celco SMART to Japan-listed Mitsui Co., Ltd (Mitsui) and local partners Southern Cross Ventures for US$158mil (RM686mil) cash.

• This involves an initial sale of a 10% stake in SMART at US$66mil and followed by a call option to sell another 10% at US$92mil, exercisable 1 year after the initial transaction, potentially reducing Axiata’s stake in SMART to 72.5%. The initial sale is expected to close by end-May 2017.

• SMART is the first mobile operator in Cambodia to provide full 4G services covering all 25 provinces of the country with an extensive nationwide network coverage over 98% of the Cambodian population, serving over 8mil subscribers. It is also the only telecom operator partner of Apple in Cambodia offering iPhones and iPads. From 2008 to 2016, SMART has spent US$967mil in capital and operating expenditure in Cambodia. A further US$80mil in capital expenditure has been committed for 4G network expansion this year.

• Based on SMART’s FY16 net profit of RM278mil and equity value of US$724mil, we estimate that the 2 transactions combined value SMART at an average FY2016 PE of only 12x and PBV of 1.1x.

• However, we understand that the market mean in Cambodia’s under-developed stock market is currently only 8x. As a comparison, Axiata currently trades at a much higher FY17 PE of 32x and PBV of 2.1x vs. FBMKLCI’s PE of 18x.

• Assuming savings of interest cost at 6%, we estimate a minimal contraction of 1% to FY18F-FY19F earnings. There should also be negligible gains at a transaction price slightly above book value. This development, which will have negligible impact to Axiata’s FY18F net debt/EBITDA of 1.3x and a slight re-balancing to Axiata’s asset portfolio, retains majority control in SMART.

• It also introduces a new shareholder and strategic partner, Mitsui which is involved in metals, machinery & infrastructure, chemicals, energy, lifestyle and innovation with deep expertise in the digital and technology space which are critical growth areas for Smart.

• SMART can leverage the expertise of Mitsui and its investee companies to further strengthen its leadership position in the fast-growing Cambodian telecom market. Additionally, there are potential synergy creation opportunities for SMART through collaboration initiatives with Mitsui.

• Recall that Axiata may also be planning to dispose of its nonperforming overseas operations such as India-based Idea Cellular and SGX-listed M1, which are likely to drag the group’s future earnings momentum, together with raising additional cash to reduce the group’s high gearing currently.

• We expect Axiata’s 1QFY17 results, expected to be announced on 25 May, to continue being dragged by Celcom’s weak earnings, Dialog-AirTel merger losses and further provisions from 19.8%-owned Idea Cellular in India, exacerbated by intense competition from rival Reliance Jio Infocomm. Hence, our FY17F earnings are 11% below consensus.

• Nevertheless, Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8.1x and less than half of SingTel's 14x.

Source: AmInvest Research - 22 May 2017