KUALA LUMPUR (April 21): UOBKayHian Research on Thursday downgraded Axiata Group Bhd to "hold" from "buy" and lowered the stock's target price to RM4 from RM4.45 as it sees the group's subsidiary edotco Group Sdn Bhd's Philippines telecoms towers' acquisition to be earnings dilutive in the near term.
The research house's analysts Chong Lee Len and Chloe Tan Jie Ying said in a note that the acquisition is dilutive to Axiata and their earnings sensitivity suggested 12% and 10% earnings downgrades for 2022 and 2023 respectively.
Axiata announced on Wednesday that its 63%-owned subsidiary edotco's 100%-owned unit ISOC edotco Towers Inc was buying 2,973 telecommunications towers and related assets in the Philippines from PLDT Group units Smart Communications Inc and Digitel Mobile Philippines Inc for 42 billion Philippine pesos (RM3.42 billion) in a move that would help the buyer establish a platform to accelerate organic and inorganic growth.
"The deal is earnings dilutive to Axiata and management only expects the acquisition to be earnings accretive in year six. We estimate RM150 million in earnings dilution after factoring in cost of debt to fund the acquisition," said Chong and Tan.
The duo also said that based on Axiata's guidance, the acquisition is priced at low to mid-teen enterprise value to earnings before interest, taxes, depreciation, and amortisation (EV/EBITDA) ratio, and at US$270,000 per site, the acquisition appears to be in line with industry standards in the Philippines.
According to them, post-acquisition, Axiata's gross debt/EBITDA will rise from 2.56 times to 2.87 times.
"We expect share price to retrace due to the long gestation period of this pricey acquisition (to Axiata — which trades at four times EV/EBITDA). As such, we believe a natural progression for edotco is a separate listing as future acquisitions will continue to be dilutive to the enlarged group," they said.
They also believed a separate listing of the edotco is a key rerating catalyst for the stock.
"Post transaction, edotco will own and manage a total of around 54,000 passive towers in the region, becoming the sixth largest towerco globally. We opine that this will pave the way for the potential listing of edotco," they said.
At the time of writing, Axiata dropped by seven sen or 1.9% to RM3.62, valuing the group at RM33.04 billion.
Over the past one year, the counter has tumbled 4.99%.
Source: TheEdge - 22 Apr 2022
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