Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with unchanged forecasts and sum-of-parts-based fair value of RM6.05/share, which translates to an unchanged FY19F EV/EBITDA of 6.5x, 1 SD below its 3-year average of 7.5x.

• We are not surprised by Axiata’s announcement of an estimated de-recognition loss of RM3.3bil from the halving of its stake in the entity arising from the merger between the group’s 16.3%-owned Idea Cellular Ltd and Vodafone Mobile Services Limited, as highlighted in our update on 26 July.

• Given Axiata’s FY18F core net profit of RM1.2bil, this could translate to an all-in loss of RM2.1bil. However, management has affirmed that the group's FY18F dividends, which will not be affected by the impairment, will be based on FY15 payout ratio of 85% on normalised net profit. While this appears high, we note that FY18F normalised earnings are half of FY15.

• If the merger is completed before the group's 2QFY18 results announcement on 24 August, Axiata will recognise the full impairment provision. If completed after the results announcement, the group will likely recognise only half of the impairment with the balance accounted for in the following quarter.

• Given the equity reduction to a non-strategic investment level of 8.2% in the Idea-Vodafone entity, Axiata has unconditionally and irrevocably relinquished its rights to appoint a representative on Idea’s board together with antidilution rights. For now, there are no disposal plans notwithstanding the absence of any lock-in exit period.

• Recall that the merger will create India’s largest telecommunications operator with a combined customer base of 440mil, representing 39% of India's total market share and 38% of revenue.

• The merged entity’s run-rate cost and capex synergies are expected to reach INR140bil (RM8bil) per annum by the fourth full year post-consolidation from network infrastructure rationalisation, higher spectrum availability and larger single radio access network deployment from rationalised sites, optimising service centres, back office and distribution outlets while streamlining regional/nationwide IT systems.

• We are mildly positive as Idea’s operating results will not be equity accounted post-merger, which should be positive for the group in the medium term given the likely continued losses of the combined entity against the background of India’s highly competitive environment driven by Reliance Jio. Idea, which contributed a FY17 loss of RM450mil to Axiata, is projected to incur a consensus loss of INR78bil in FY March 2019 and INR68bil in FY March 2020.

• Hence, we maintain Axiata’s forecasts for now, pending its results announcement next week. Axiata currently trades at a bargain FY18F EV/EBITDA of 6x, which is half of Singapore Telecommunications' 12x.

Source: AmInvest Research - 17 Aug 2018