Highlights

• edotco Pakistan (wholly-owned subsidiary) has entered into an agreement with Tower Share (Private) Limited to acquire 100% of its subsidiary, Tanzanite Tower Private Limited (TTPL) for a cash consideration of US$90m (RM385.4m).

• This proposed acquisition will be funded through internally generated funds.

• TTPL owns 700 towers providing tenancies to all major cellcos in Pakistan with a strategic split of ~97% urban and ~3% rural.

• This will strengthen its position to accelerate tower build out and take advantage of further acquisition / consolidation opportunities towards achieving its ambition to be the largest independent tower company in Pakistan.

• The deal is subject to multi regulatory approvals and expected to complete in 3Q17.

Financial Impact

• Funding would not be a concern and is supported by war chest injected by new investors, namely INCJ and KWAP with US$400m and US$100m, respectively earlier this year.

Comments

• We welcome this development as it marks edotco’s first tower asset in Pakistan since inception in 2015.

• Pakistan is one of the few countries which is expected to see moderate growth leveraging on its: 1. Huge population: 193m as end of 2016; 2. Low mobile penetration rate: ~71% in Apr 17; 3. 3/4G at infancy stage with only 37m (26% of total) and 5m subs (4% of total), respectively in May 17; and 4. Low smartphone adoption: 9.2%.

• Post-acquisition, this would increase edotco’s tower portfolio by 4% to 18.1k towers.

• These 700 towers command a slightly lower tenancy ratio of 1.4x compared to existing’s 1.6x. Potential for improvement as the market is dominated by 4 major cellcos, namely Jazz (Mobilink and Warid), Telenor, Zong and Ufone.

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 further guidance from management.

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 rating with unchanged SOP-derived TP of RM4.65

Source: Hong Leong Investment Bank Research - 21 Jun 2017