• Axiata announced that merger talks with Telenor has ended which came as a surprise after denying recent rumours of the deal falling through during its recent quarter results briefing.
• Management cited that the termination was due to complex issues faced which we believe could have predominantly arisen from the regulatory standpoint.
• While the 2Q19 performance saw growth efforts finally gained traction, regulatory risks are inherent and affected several OpCos; we throw caution over its near/mid-term prospects.
• Downgrade to TRADING SELL with an unchanged TP of RM4.25.

Surprising termination

We were surprised over Axiata's recent announcement of merger plans with Telenor coming to an abrupt end after management denied recent rumours of the deal breaking down during recent quarterly briefing. It cited the termination was caused by complexities involved in the plan which we believe could have predominantly arisen from the regulatory standpoint at both the domestic and regional levels.

About the merger plan

To recap, on 6 May 2019, Axiata announced that talks are underway of a possible merger with Telenor. Domestically, MergedCo would be listed in Bursa Malaysia with assets derived from Telenor’s and Axiata’s regional OpCos including MalaysiaCo. The tower business would also be injected into this entity with existing towers at Telenor’s regional OpCos to be injected into the Global TowerCo vehicle. Axiata's share price have risen over 20% since announcement of the merger first broke due to positive response by the market.

Cautious over near/mid-term business prospects

We are cautious over Axiata's near/mid-term prospects given exposure to regional market which has been volatile due to currency fluctuations and hostile regulatory changes at some of its key OpCos (India: Idea, Indonesia: XL Axiata, Bangladesh: Robi, and Nepal: NCell). Additionally, earnings also weighed down by Celcom’s legacy issues.

Downgrade to TRADING SELL with an unchanged TP of RM4.25

Downgrade to TRADING SELL with an RM4.25 TP. While we see hidden values from in its regional footprint, we believe current share price have ran ahead of fundamentals. We are less sanguine on the stock owing to the challenging outlook facing the sector and inherent regulatory risks at some of its key markets.

Source: BIMB Securities Research - 10 Sept 2019