Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with 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 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, media has speculated that the group Axiata has requested proposals from investment banks to structure an initial public offering.

• edotco Group has entered into a sale and purchase of shares agreement to acquire an 80%-stake in Kedah-based telecommunications tower operator Tanjung Digital Sdn Bhd for RM140mil cash from Utara Jernih Sdn Bhd and Mohd Azam Saad.

• The transaction allows edotco MY to expand its presence in Kedah by 225 towers, which is 6% of edotco’s current portfolio of 4,004 towers in Malaysia and 1% of the group’s total 16,533 towers.

• We view the purchase price as expensive, translating to US$199,430/tower, 2.7x compared to US$75,109/tower, which was the acquisition price for 13,700 towers in Pakistan in August last year.

• In 2017, the state of Kedah granted to Tanjung Digital the rights for the construction of telecommunication infrastructure in the state. The company is licensed under the Communications and Multimedia Act 1998 as a network facilities provider to engage in the business of construction and leasing or renting of telecommunication towers in Kedah.

• The consideration, less than 1% of Axiata’s total debt of RM19bil as at 31 Dec 2017, will be earmarked for Tanjung Digital’s share sale at RM25mil and debt repayment of RM115mil.

• The announcement did not provide any financial guidance on Tanjung Digital except that management indicated that the acquisition will be earnings accretive. However, assuming a conservative EV/EBITDA of 10x, compared with the 8.1x acquisition EV/EBITDA of the 13,700 Pakistan towers (which have a different risk profile), we estimate a negligible impact to FY19F earnings.

• For FY17, edotco accounts for 6.3% of Axiata’s revenue and 7.4% of group EBITDA. Based on an average FY18F EV/EBITDA of 16x for the 5 largest global listed tower companies (see Exhibit 1) and assuming a 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.

• 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 - 7 May 2018