Highlights

• Through its subsidiary, Axiata entered into a Share Purchase Agreement with Mitsui for the disposal of 10% stake in Smart Axiata for a total cash consideration of US$66m (RM285.7m).
• Subsequently, it also entered into an Amended and Restated Shareholders Agreement (ARSA) to govern relationship which includes inter-alia, a call option to Mitsui for further 10% stake in Smart.
• Mitsui may exercise the call option within 12 months after the completion of the initial sale at the pre-agreed exercise price which is 40% higher, estimated at US$92.4m (RM400m).
• The initial sale is expected to complete by end-May 2017.
• This transaction was made after a formal evaluation process involving a diverse mix of investors and based on Smart?s equity value of US$724m which includes additional cash upstreaming pursuant to the transaction structure.
• Axiata views Mitsui as a strategic shareholder given its deep expertise in the digital and technology space which are critical and attractive growth areas for Smart.
• The minority stake sale helps Axiata to rebalance its portfolio while retaining majority control in Smart. The proceeds are intended for general corporate purposes and repayment of existing debt. Financial Impact
• This is a relief to Axiata?s highly geared balance sheet with debt amounting to RM22.3bn or gross debt/EBITDA of 2.6x as end of FY16.
• Axiata remains committed to maintain gross debt/EBITDA to below 2.5x.

Comments

• We view this positively as it allows Axiata to reduce debt burden while maintaining control of Smart.
• This asset monetization also reflects Smart?s deep valuation which may fetch at least RM2.9bn.

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

• Maintained pending 1Q17 results release which is slated on 25 May 2017.

Rating

HOLD ↔ , TP: RM4.65 ↔

• Regional exposure 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 RM4.65 .

Source: Hong Leong Investment Bank Research - 22 May 2017