Axiata and Telenor have called off their merger due to some complexities involved. A negative surprise, and both Axiata and Digi may experience selling pressures. Malaysian mobile market will remain intense with 5 players and rivalry will spill over on spectrum allocations. Axiata shared that there is no re-merger plan with TM while exploring monetization plans for edotco and digita businesses. Maintain NEUTRAL with TIME (BUY, TP: RM10.14) as our sole top pick.

NEWSBREAK

Axiata Group and Telenor ASA have mutually agreed to end discussions regarding a non-cash combination of their telecom and infrastructure assets in Asia. Over the last 4 months, both parties have been working on due diligence and finalising transaction agreements to be completed within 3Q19. Due to some complexities involved, both have mutually agreed to end the discussions.

Both parties still acknowledge the strong strategic rationale of the deal. They do not rule out that a future transaction could be possible.

Axiata stated that this termination will not in any way affect the Group in its ability to achieve its Digital Champion aspirations by 2022. Operating from a position of strength, it is confident in its capacity to leverage opportunities across the customer, home, enterprise / IoT, digital and towerco businesses as the global industry moves towards convergence.

HLIB’s VIEW

Hype to fizzle. This marriage was a challenging one to start with given the risks (especially regulatory / political) that we had highlighted before. Having said that, we take this as a slight negative surprise that this proposed amalgamation fell through at early stage. In the absence of this catalyst, both Axiata and Digi may experience selling pressures as investors reassess their valuations based on fundamentals.

Back to square one. With this failed in-country consolidation, Malaysian mobile market will retain 5 MNOs with competition intensity to sustain. Besides that, rivalry will also be focused on spectrum allocation, particularly on the prized 700MHz as MCMC intends to split it only into 4 blocks of 2×10MHz.

Re-merger with TM? Axiata shared that there is no such plan but instead will work even closer with TM on fibre network in order to drive convergence and 5G.

Monetization plan. Axiata will revisit edotco monetization plan and did not rule out other avenues besides IPO. Options for digital businesses (Boost, ada and apigate) will also be evaluated. However, no timeline was provided.

Forecast. Unchanged as we did not factor in merger impact in our assumptions.

Maintain NEUTRAL. Telco sector remains stable supported by resilient domestic demand. At this juncture, we prefer wired over wireless players. Their dependable dividend yield will be a plus point in a volatile market. Top pick is TIME (BUY, TP: RM10.14). We like TIME as its retail is gaining momentum on the back of reach expansion and undisputable high value products. Also, data centre is expanding resiliently as IT outsourcing, cloud computing and virtualization are widely adopted. GBS is no longer a drag and expected to perform better as demand recovers.

Source: Hong Leong Investment Bank Research - 10 Sept 2019