Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.30/share, on expectations of a value-enhancing re-merger with TM which could reduce the valuation differential with its peers and re-energise its earnings prospects.

• Bloomberg reported that Axiata is tentatively planning a domestic listing of its 62%-owned edotco Group Sdn Bhd this year, which could raise US$500mil (RM2bil) in an initial public offering. The group may be inviting investment banks to formally pitch for a role in the deal this quarter.

• As we had updated in April last year, Axiata placed out US$700mil (RM2.8bil) of edotco’s shares to Innovation Network Corporation of Japan, Khazanah Nasional and Kumpulan Wang Persaraan which then valued edotco’s equity at US$1.5bil based on a FY16 EV/EBITDA of 12.5x.

• For 9MFY17, edotco accounts for 6% of Axiata’s revenue and 7% of its EBITDA. edotco’s 9MFY17 EBITDA was flat at RM514mil even though revenue rose 10% YoY. Its 9MFY17 capex rose 24% YoY to RM500mil, which accounts for 12% of Axiata’s group capex.

• Established in 2012, edotco is the first regional integrated telecommunications infrastructure services company in Asia, providing end-to-end solutions in the tower services sector from tower leasing, co-locations, build-to-suit, energy and transmission to operations and maintenance.

• As at 3QFY17, edotco’s tower portfolio has risen by 10% YoY to 16,391 while its managed sites increased by 17% YoY to 10,821. Half of the group’s directly-owned towers are in Bangladesh while 24% are in Malaysia, 13% in Cambodia, 8% Myanmar and 4% Pakistan.

• edotco is currently the 8th largest global tower company and 2nd largest multi-national tower company with 27,212 sites owned and managed. Management’s strategy is to continue to expand organically and via acquisitions, while tenancy ratio has improved to 1.5x from 1.4x in Dec 2016.

• Currently, American-based tower companies are trading at FY18F EV/EBITDA valuations of 18x-21x while Indonesia at 9x-13x.

• Assuming the higher range of EV/EBITDA of 13x and assuming an FY18F EBITDA growth of 10%, we estimate that edotco’s equity valuation could reach RM8bil, which will raise Axiata’s SOP by 14%. Our current fair value does not include the potential value enhancement from edotco.

• Hence, we are positive on Axiata’s potential unlocking of edotco’s embedded valuations, which could catalyse the group’s valuation re-rating while securing additional cash estimated at up to RM2bil – 14% of Axiata’s FY18F group debt, and reduce the group’s net debt to EBITDA from 1.4x to 1.2x. Potential earnings impact will be minimal given the group’s huge base.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8x vs. SingTel’s 14x.

Source: AmInvest Research - 5 Jan 2018