Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.60/share, which translates to a FY19F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel).

• Our valuation is premised on a potential value-enhancing re-merger with TM which could reduce the valuation differential with its peers and re-energise its earnings prospects.

• Axiata is expected to incur a potential loss of RM241mil, 17% of the group’s FY18F earnings, from the placement of 424mil Idea Cellular (Idea) shares at an issue price of INR82.50/share worth INR35bil to eligible qualified institutional buyers.

• This placement will dilute Axiata’s stake in India-based Idea from 18% to 16%. Idea currently accounts for 6% of Axiata’s SOP.

• The estimated loss arises from the shortfall between the proceeds from the placement and the carrying value of the group’s stake in Idea.

• Additionally, Idea’s impending merger with Vodafone will cause Axiata’s stake to drop to below 10%, rendering it to a non-strategic investment for the group.

• Given its non-strategic stake in the post-merger IdeaVodafone entity, management has indicated that Axiata may look to dispose of its investment in India.

• Nevertheless, as Idea’s operating results will not be equity accounted post-merger, this should be positive for the group in the medium term given the likely losses that combined entity are likely to incur against the background of India’s highly competitive environment spearheaded by new entrant Reliance Jio.

• Based on consensus expectations, Idea is projected to incur a loss of INR44mil in FY March 2018 and INR46mil in FY March 2019.

• We highlight that the group will be further providing a RM1.2bil-RM1.8bil non-cash impairment upon completion of the impending Idea-Vodafone merger by 1HFY18, which could translate to a FY18F loss.

• We understand that this will cut the carrying value of its stake in Idea by 30% to RM4.5bil. However, these cash non-impairments should not have any substantive impact to the group’s FY18F normalised earnings, which excludes provisions, and the group’s dividend-paying capability.

• Hence, we are neutral on this development. Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8.1x vs SingTel’s 14x.

Source: AmInvest Research - 26 Feb 2018