- We maintain our BUY call on Axiata and raise our FV to RM7.30/share (from RM6.90/share) following its post-results teleconference last Thursday.

- XL did not confirm nor deny that it is bidding for Axis, but advocates for industry consolidation in Indonesia. The main reason for XL to look at M&As is to acquire more spectrum, which would reduce network rollout cost, especially in dense areas. Its consideration revolves around valuation of the acquiree versus the cost of having to deploy more sites to cover dense areas using its existing spectrum. Axis’ spectrum is positioned next to XL, making it an attractive M&A candidate for spectrum expansion purposes.

- On near-term fundamentals, XL expects to gradually raise price points again after adjusting rates down in 4Q12-1Q13. We think 1Q13 is bottom for XL’s earnings, but a recovery should be pretty gradual. More importantly, XL is now relooking at its rate of network expansion as take-up rate does not seem to match the aggressive pace of expansion. We lower our capex projection to the lower end of management guidance of Rp8-9tril, which gives rise to the increase in our FV.

- A larger spectrum from a potential acquisition could see further reduction in our capex projection. As of end 1Q13, XL has RM160mil in gross cash (vs. RM3bil indicative EV for Axis) and entails 91% net gearing, or 1.9x net debt to EBITDA. As such, we think any acquisition could raise possibilities of a rights issue at XL – and we think Axiata may utilise part of its USD1.5bil Sukuk to subscribe to its portion. At this juncture, it is uncertain if any rights issue would allow possibilities of Axiata raising its existing 67% stake in XL.

- Celcom shared its strategy on driving up data margins (currently at 33% EBITDA margin) – by focusing on migrating low margin dongle users (15%-18% margin) to higher margin small-to-mid screen (40% margin) e.g. tablets, smartphones. Celcom also expects further network cost reduction from fibre sharing and tower sharing with Digi – targeting network cost at 8.5% of revenue (in the mid-term) from c.10% of revenue currently.

- In Bangladesh, Axiata has put in USD286mil for Robi’s 2G license payment. So far, 30% partner NTT Docomo has yet to match the amount. Any failure to do so raises possibilities of Docomo substantially diluting its stake in Robi (potentially to c. 10%). Robi registered one of the strongest growth (+50% yoY) among key opCos and currently contributes 9% to group EBITDA.

- Axiata’s balance sheet is relatively underleveraged and a ready USD1.5bil credit line could give rise to upside risks to our numbers:- (1) Acquisition in Indonesia – depending on valuation ; (2) Myanmar rollout if successful in its bid; (3) Potential dividend upside – as it is, management is firm on at least maintaining dividend payout (FY12 payout ratio: 75%).

Source: AmeSecurities