Highlights

• Announced that it has entered into an exclusive discussion with Bharti Airtel to explore the possibility of combining the business operations of their OpCos in Bangladesh, namely Robi Axiata and Airtel Bangladesh (AB).

• There is no certainty that this discussion will lead into the execution of binding definitive agreements between them.

• This is to facilitate the on-going discussions and exchanges of information, including but not limited to discussions with the relevant regulatory authorities.

Comments

• This came as a positive surprise while the floatation of Robi is still in the works towards next year.

• With limited information disclosed at this preliminary stage, a conclusive stance is difficult. Nonetheless, we concur with Axiata’s continuous focus on in-country consolidation which may lead to healthier competition, cost savings and higher efficiency.

• According to reports, the move comes as part of Bharti Airtel's initiative to restructure operations in all markets where it trails one or more market leaders.

• Adding AB’s over 9m subs on top of Robi’s 27.3m as of 2Q15, the combined entity will become second largest, superseding Banglalink and behind market leader Grameenphone.

• In Bangladesh, mobility is still at infancy stage and dominated by prepaid voice and SMS. As of Nov 2014, mobile and data penetration rates stood at circa 72% and about 25% on the back of 166m population with both 3-year CAGRs projected at 12.0% and 19.2%, respectively.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and listing of Robi.

Risks

• Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

• Maintained.

Rating

• BUY , TP: RM7.52

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

• Reiterate BUY on the back of unchanged SOP-derived TP of RM7.52 (see Figure #2).

Source: Hong Leong Investment Bank Research - 10 Sep 2015