Highlights

• Propose to acquire 80% stake in Nepal’s Ncell for a total cash consideration of USD1.4bn (RM5.9bn) from TeliaSonera and SEA Telecom Investments. The remaining 20% will be transferred to a new local partner in compliance to regulation.

• Attractive: Valued based on 5x EV/EBITDA, which is lowest compared to Axiata’s 8.3x, South Asia’s 5.7x and SEA’s 8.4x. To be funded via a combination of internally generated funds, debt instruments and external borrowings.

• Brownfield: Ncell is Nepal’s #1 full-fledged cellco with 13m subs (49% market share) with 2G/3G coverages at 90%/20%.

• Growth market: A duopoly market with young demographics (68% < age of 35). Unique mobile/broadband penetrations are at 51%/22% on the back of 28.8m population. Ncell’s FY13-15 revenue/EBITDA/PAT experienced CAGR of 20%/27%/19% supported by superior average EBITDA margin of circa 60%.

• Operating synergies including IDD calls and m-remittance.

• Earnings accretive: Ncell will lift FY14 pro forma revenue/ EBITDA/PATAMI by 9%/14%/11%.

• Risks: (1) IDD which contributes 35%-40% to sales will face OTT cannibalization; (2) Expiry of all spectrum licenses in 2019; and (3) FOREX.

• Subject to shareholders and BNM’s approvals and target to close in 2Q16. Financial Impact

• Immediate accretion as stated above while EBITDA margin and FCF to improve by 2-ppt and 24%, respectively.

• Gross debt/EBITDA will increase from 2.0x to 2.3x but this is not expected to affect dividend policy.

Comments

• We laud this deal and opine that merits far outweigh the risks.

• While OTT threat is inevitable, we are not too concern about its disruption on IDD in the near term given the infancy of 3G. Moreover, fragmented and limited spectrum allocations would restrain OTT/VoIP calls which demands high QoS.

• Upon expiry of spectrum licenses, Axiata does not expect any auction and believe they will be extended. We concur and believe that Ncell’s dominance yields high bargaining power.

• Reduce the reliance on Celcom. Based on FY4 pro forma, Ncell will be the largest contributor outside Malaysia with contribution of 9%/13%/19% to revenue/ EBITDA/PATAMI. It will also support Group’s dividend paying capacity.

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 - 22 Dec 2015