Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with a lower sum-of-parts-based fair value of RM6.20/share (from an earlier RM6.60/share), which translates to an unchanged FY19F EV/EBITDA of 6.5x, which is 1 SD below its 3-year average of 7.5x. Our lower valuation stems largely from the 47% decline in Idea Cellular’s share price since the beginning of the year.

• The media has reported that the approval for the merger of Axiata’s 16.3%-owned Idea Cellular with Vodafone could materialise within this month as both companies have recently settled their obligations under protest to India’s Department of Telecom (DoT).

• The settlement included INR3,926 crore (US$571mil) in cash and INR3,322 crore (US$484mil) in bank guarantees, totalling INR7,248 crore (US$1.1bil), which both operators had earlier appealed to the DoT to recalculate. However, the DoT had rejected their proposal.

• Recall that Idea Cellular has agreed to a merger with unlisted Vodafone India Mobile Services, India’s second largest mobile operator in India, that will surpass Bharti AirTel as the country’s largest operator with 430 million customers, 35% customer market share and 41% revenue market share. Generally, Vodafone has a stronger footprint in urban areas while Idea is better placed in rural and semi-urban regions.

• However, the merger will cause Axiata’s equity stake in the merged Idea-Vodafone entity to halve to a non-strategic investment level of 8.2%. Hence, management had earlier 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 continued losses that the combined entity is likely to incur against the background of India’s highly competitive environment driven by Reliance Jio. Based on consensus expectations, Idea is projected to incur a loss of INR65bil in FY March 2019 and INR56bil in FY March 2020.

• As Idea’s share price has significantly fallen to INR55/share from over INR100/share since the beginning of the year, the group may need to provide for a higher non-cash impairment of up to RM3bil vs. an earlier range of RM1.2bil-RM1.8bil. This could halve the carrying value of its stake in Idea from RM5.4bil currently to RM2.4bil.

• While likely to result in an FY18F loss of RM1.8bil, these non– cash impairments should not have any substantive impact to Axiata’s FY18F normalised earnings, which exclude provisions, nor the group’s dividend-paying capability. Hence, we maintain Axiata’s forecasts for now, pending the results announcements of PT XL Axiata next week and the group’s next month.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, which is half of Singapore Telecommunications' 12x.

Source: AmInvest Research - 26 Jul 2018