Highlights

The board has approved the proposed dividend reinvestment scheme (DRS) that will provide shareholders the option to elect to reinvest in whole or in part their cash dividend, which includes any interim, final or special or other cash dividend, in new ordinary shares of RM1 each.

The new shares’ issue price shall not be more than a 10% discount to the 5-day volume weighted average market price (VWAP) of the shares immediately prior to the price fixing date. The VWAP shall be adjusted ex-dividend before applying the said discount in fixing the issue price.

The net cash savings from the DRS will be utilized for working capital purposes of Axiata and its subsidiaries.

The purpose of this exercise is to strengthen Axiata’s capital position as well as improving its stock liquidity.

Shareholders are expected to benefit from their participation in DRS as the new shares may be issued at a discount and their subscription of new shares will be free from any brokerage, fees and other related transaction costs.

DRS is planned to be effective in 2H14 subject to regulatory and shareholders’ approvals.

Financial Impacts

Although this is dependent on the quantum of the dividend, Board’s decision on the proportion/size of the Electable Portion, extent to which shareholders elect to exercise DRS and issue price, it is expected to improve the consolidated gearing position of the company but there will be EPS and ROE dilution.

Financial impact simulation based on 3 broad scenarios (see Figure #1) resulted in a maximum dilution of 1.77% with substantial gearing improvements. Caveats: based on FY13 financial position and without DRS related expenses.

Comments

Positive development as DRS rewards shareholders with discounted new shares which will provide additional yield pick-up. We believe that this advantage will outweigh the minor dilution and drag on ROE.

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

Unchanged.

Rating

HOLD, TP: RM6.92

Positives – mobile internet growth, margin improvements through collaborations/sharing, recoups prepaid tax via GST, unlock value through tower listing.

Negatives – Challenging operating environment in Indonesia, Axis to weigh down XL in the short term, OTT substituting voice and SMS, unable to monetize data.

Valuation

Maintain HOLD with unchanged SOP-derived TP of RM6.92 (see Figure #3).

Source: Hong Leong Investment Bank Research - 24 Mar 2014