Highlights

• edotco entered into a Sales and Purchase Agreement (SPA) with YSH Finance (YSH) for the acquisition of 250k ordinary shares or 12.5% stake in the share capital of edotco SG, the parent company of edotco Myanmar.

• Upon completion, edotco will hold 87.5% interest in edotco Myanmar.

• Acquisition at a cash consideration of USD35m (RM147m) was arrived after taking into consideration; inter-alia, the actual 12-month EBITDA performance of edotco Myanmar up to 30 Sept 2016 and assignment and transfer of outstanding loans advance by YSH to edotco SG.

• Following the completion of the acquisition and the SPA becoming unconditional, the Put and Call Option Agreement will be terminated and parties will execute a revised and restated shareholders agreement including a right of first offer to edotco in the event of a proposed sale by YSH of the remaining Options Share with the above as the base price.

Financial Impact

• Imputing this deal and the pending payment of Celcom’s spectrum fee which amounted to RM817m, the pro forma net debt to EBITDA (based on Ncell’s EBITDA of 8.5 months in FY16) ratio will increase from 1.53x to 1.64x, still below its self-imposed ceiling of 2.0x.

Comments

• Recall that this Put and Call Option Agreement was inked to protect YSH’s downside limited by the last transacted price with Digicel in order to keep Yangon-based Yoma (YSH’s parent) as a strategic partner.

• Not a surprise as we understand that tower leasing business is a non-core asset to the Burmese conglomerate and the disposal proceed is likely to be plough back its real estate project, including the Landmark Development.

• A positive move for Axiata as tower assets yield long term recurring income and shielded from any market competition while it was reported that Myanmar’s era of rapid subscriber growth following the opening up of the economy has ended.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and in-country consolidations.

Risks

• Regulatory risks, price wars and high gearing level.

Forecasts

• Unchanged pending analyst briefing in conjunction with Axiata’s 3Q16 results announcement slated by end of Nov.

Rating

HOLD ↔, TP: RM5.64 ↔

• Regional exposures with focus on emerging countries with great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a long term catalyst.

Valuation

• Maintain HOLD with unchanged SOP-derived TP of RM5.64

Source: Hong Leong Investment Bank Research - 8 Nov 2016