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 an 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’s 83.3%-owned Dialog Axiata (Dialog) is expanding its digital footprint by entering into a shareholder agreement with St. Anthony’s Property Developers (Private) Limited to acquire a 35% equity stake for Rs262.5mil (RM7mil) in Digital Reality (Private) Limited to operate and manage a data centre business in Sri Lanka.

• This minor investment will have a negligible impact to the group’s earnings, asset base and gearing. However, as Dialog Axiata, which accounts for 4% of Axiata’s SOP, is Sri Lanka’s second largest fixed telecommunications provider and serves residential and enterprise customers with voice, broadband, leased lines, data centre solutions and other customised telecommunication services, this strategic acquisition is to enlarge the group’s data management services.

• As such, Dialog has further expanded its portfolio by investing in digital services in wholly-owned Digital Commerce Lanka (Private) Limited), a 70%-stake in Digital Health Digital Health (Private) Limited), a 51% stake in Headstart (Private) Limited) involved in digital education and Mobile Money Service eZ Cash for digital financial services (through its internationally acclaimed, and 99% ownership in Colombo Trust Finance PLC).

• In FY17, Dialog’s revenue, EBITDA and normalised net profit grew 9%, 16% and 19% respectively from strong home broadband expansion and aggressive market penetration.

• Apart from Sri Lanka, Axiata is expected to incur 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.

• 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.

• While this will cut the carrying value of its stake in Idea by 30% to RM4.5bil, these impairments should not have any substantive impact to the group’s FY18F normalised earnings, which excludes provisions. Hence, we are mildly neutral on this upcoming development, which is unlikely to impact the group’s dividend paying capability.

• 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 - 21 Mar 2018