Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged forecasts and 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 remerger with TM which could optimise synergies while narrowing the valuation differential with peers and re-catalysing its earnings prospects.

• We highlight that our SOP valuation has not incorporated any DCF from the group’s 62%-owned tower infrastructure company called edotco, currently assuming it as part of the group’s operations in supporting its cellular communications business.

• However, as we have reiterated for the past two years, the group has been exploring the potential of listing its telco tower business. The Edge Weekly has reported that Axiata is requesting proposals from investment banks to structure an initial public offering.

• In contrast with the highly competitive domestic cellular business, edotco has shown commendable growth from its expanding portfolio and operational performance, as its F17 revenue grew 11.8%, driven by higher tenancy across all footprints and maiden contribution from acquisitions in Pakistan.

• For FY17, edotco accounts for 6.3% of Axiata’s revenue and 7.4% of group EBITDA. While it has been expanding inorganically via acquisitions, edotco’s capex growth has been quite mild, rising 3% YoY to RM416mil.

• As at 4QFY17, edotco’s ownership of towers has grown 9% YoY to 16.5k while sites under management has risen by 7% YoY to 10.9k. Additionally, its 4Q17 tenancy ratio rose to 1.6x from 1.4x in 4Q16.

• The other stakeholders in edotco are Innovative Network Crop of Japan at 22%, Khazanah Nasional at 11% and KWAP at 5%. KWAP’s acquisition of its stake edtoco in April 2017 values its equity at US$1.5bil, based on the same benchmark set for the private placement to INCJ and Khazanah back in December 2016. However, based on an average FY18F EV/EBITDA of 16x for the 5 largest global listed tower companies (See Exhibit 1) and assuming debt of US$500mil, we estimate that edotco could easily be valued at US$2bil, potentially raising Axiata's SOP by 13% to RM7.45/share.

• Recall that Axiata will be providing a RM1.2bil-RM1.8bil noncash impairment upon completion of the impending IdeaVodafone merger by 1HFY18, which could translate to a FY18F loss but should not have any substantive impact to the group's FY18F normalised earnings, which excludes provisions.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8.1x vs. SingTel's 14x, with a near-term catalyst from the upcoming edotco listing.

Source: AmInvest Research - 9 Apr 2018