Highlights

Obtained official green light from Ministry of Communication and Informatics (MoCI) to acquire PT Axis Telekom Indonesia on 29th Nov.

This approval letter is a proof that the government supports the consolidation efforts that will lead to a better and more sustainable industry. This will serve as future reference for focused business growth and efficient CAPEX.

This approval came with the condition that XL to handover Axis’ 2×10MHz in the 2.1GHz frequency which is meant for 3G and only allowed to retain Axis’ 2×15MHz in the 1800MHz for 2G coverage.

XL opined that this is the optimal outcome considering the annual costs of spectrum versus potential CAPEX savings by retaining only the 2G spectrums which will deliver the most incremental value going forward. Previously, XL was expecting to only return 2×5MHz in the 2.1GHz frequency to the government.

The mutually beneficial businesses of XL and Axis will provide numerous revenue and cost synergies. The merger is expected to reduce CAPEX and OPEX significantly.

Touted to be a major milestone achievement and XL is confident to close the transaction by the end of 1Q14.

In parallel, XL is seeking approvals from BKPM, OJK and KPPU, which will be followed by seeking shareholders’ approval from EGM.

Comments

A pleasing outcome for Axiata as the sanguinity on the acquisition approval overwhelms the minor regret on the pullback of 3G spectrum.

We are not overly concern as:

1. XL is facing capacity constraint in 2G rather than 3G.

2. Already allocated with the most 3G spectrum (3 blocks), on par with industry leader Telkomsel (see Figure #1).

3. Avoid any objection / blockage from industry rivals.

We see more value in 1800MHz as this spectrum can be refarmed for 4G rollout in future and is the most popular LTE band worldwide as it confers various benefits including superior propagation characteristics, better indoor coverage, wide device availability and ease of roaming.

We are confident that Axiata is capable to turnaround the loss-making Axis over a short term period leveraging on their extensive experience in in-country consolidation.

Catalysts

• Higher smartphone penetration boosting data ARPU.
• Strong growth in low penetration developing markets.
• More cost savings from collaboration with DiGi.

Risks

Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

Maintained.

Rating

HOLD, TP: RM7.05

Positives – Despite the challenging environment, Axiata’s main OpCo (Celcom, XL, Dialog) continue to execute well.

Negatives – Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation

Maintain HOLD call with unchanged SOP-derived fair value of RM7.05 (see Figure #3).

Source:Hong Leong Investment Bank Research - 3 Dec 2013