Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.20/share, which translates to an unchanged FY19F EV/EBITDA of 6.5x, 1 SD below its 3-year average of 7.5x.

• As we highlighted last week, the regulatory approval for the merger between Axiata's 16.3%-owned Idea Cellular Ltd and Vodafone Mobile Services Limited has been given by India's Department of Telecommunications.

• Recall that the Vodafone-Idea merged entity will have a combined customer base of 440mil, representing 39% of India's total market share and 38% of revenue.

• The merger strengthens Vodafone-Idea’s position to compete in a three-player market with synergistic benefits drawn from the best spectrum allocation and operational efficiencies.

• 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%.

• As forewarned, Axiata has indicated a technical non-cash accounting adjustment estimated at RM1.5bil to RM3bil based on the share price at the point of the reclassification date, which will be included in the group’s 2QFY18 results next month.

• This is in line with our estimated non-cash provision for diminution in value of RM3bil in 2QFY18 results due to ldea's depressed share price vs. its current book value of RM5.4bil in Axiata's accounts.

• The reclassification date and the exact technical impairment will be known upon the final completion of the merger, which is also expected next month.

• As Idea’s operating results will not be equity accounted postmerger, 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.

• 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 with a cash balance of RM5.7bil as at 31 March 2018.

• Hence, we maintain Axiata’s forecasts for now, pending a teleconference later today, the results announcements of PT XL Axiata tomorrow 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 - 30 Jul 2018