Axiata (Hold)

Fruitful Dialog with Suntel

'''' Axiata announced that Dialog has entered into a Share Purchase Agreement (SPA) to acquire 100% of the ordinary shares of Suntel Ltd from its current shareholders.

'''' The acquisition price tag is in the range of USD33.9m and USD34.9m, corresponding to a valuation multiple of 3.0x to 3.1x of the EBITDA of Suntel for financial year ended 31 December 2010. This purchase will be financed via internal generated funds.

'''' Although the acquisition cost is perceived to be relatively cheap comparing to Axiata's EV/EBITDA of 5.7x for FY11, Suntel's contribution to the bottom line is not expected to be very positive assuming high gearing and hefty depreciation cost as a result of CAPEX intensive nature of the telecommunication business.

'''' However, we view this positively as this acquisition will allow Dialog expand its market share especially in the corporate and SME segments. The firm said that the merged entity will have 23% of the fixed access market share.

'''' The merger would allow Dialog to enjoy greater cost savings and efficiency through economy of scale and scope. This can be achieved by consolidating radio sites, sharing transmissions / backhaul, data centers, marketing (cross-selling) and rationalizing distribution network.

'''' We have cross checked with Axiata that Dialog does not need to surrender Suntel's spectrum licenses to the government after the acquisition.

'''' We reiterate our HOLD call with unchanged target price of RM4.92.

''

KLCI: Uptrend intact as KLCI reclaimed 1450''

'''' The local bourse displayed some resilience yesterday as it managed to recouped a 14.6-pt loss to end 1-pt marginally higher and closed above the uptrend line support, despite overnight Dow's fall and sluggish regional markets.

'''' We remain cautiously optimistic that the KLCI is likely to offer some counterbalance to the uncertainty in Europe and advocate the strategy of buy on weakness and take profits in any rebound, in anticipation of year-end window dressing. Resistance levels are 1476-1487 whilst supports are 1448-1454.