Axiata’s 63%-owned edotco has entered into a SPA for the acquisition of 2,973 telecom towers in the Philippines through a sale and lease back transaction with subsidiaries of PLDT for RM3.42bn. We view this positively as this transaction comes with solid and long-term sale and leaseback MSA terms from a strong counterparty, along with attractive pipeline of B2S growth opportunities. Besides, there are great colocation potentials. As Philippine government has the target to increase towers to 66k (from 25k as of June 2021), this development will position edotco to capture substantial share of future tower roll-outs Reiterate HOLD with unchanged SOP-derived TP of RM4.06.

NEWSBREAK

The deal. Axiata’s 63%-owned edotco, through its wholly-owned Philippines subsidiary, announced that it has entered into a Sale and Purchase Agreement for the acquisition of 2,973 telecom towers in the Philippines through a sale and lease back transaction with subsidiaries of PLDT for PHP42bn (RM3.42bn).

Tower profile. Comprises a wide geographical spread of sites across the Philippines, with primarily ground-based towers (89%) and high colocation potential on both acquired towers and future BTS. Regional distribution: Metro Manila (8%), South Luzon (26%), Mindanao (33%) and Visayas (33%). Site area distribution: urban (60%) and rural (40%). Tower average height: >40m (71%), 10-40m (22%) and <10m (7%).

MSA and B2S. PLDT will enter into a leaseback agreement for an initial 10-year Master Agreement, with 2 optional 5-year renewal periods as Anchor. The monthly base rate for the sale and leaseback and BTS will be PHP100k and PHP120k per tenant per month (tower and power) respectively with inflation escalator of up to 3% on the operation and maintenance component. On top of the sale and leaseback of the towers, PLDT has also committed to place orders for an additional 750 build-to-suit (B2S) towers.

Timeline. Closing will be in batches, with the first batch of 1.5k towers is expected to be transferred by 2Q22 and the full portfolio before end-2022.

Financials. Upon completion, Philippines tower count contribution will increase from <1% to 6% while revenue contribution will increase from <1% to circa 13% (based on FY21A). These towers are also generating attractive EBITDA margin of circa 76% vs edotco’s existing EBITDA margin of 63%.

HLIB’s VIEW

We view this positively as this transaction comes with solid and long-term sale and leaseback MSA terms from a strong counterparty, along with attractive pipeline of B2S growth opportunities. Besides, there are great colocation potentials for the remaining 2 cellcos to share these passive infra. As Philippine government has the target to increase towers to 66k (from 25k as of June 2021), this development will position edotco to capture substantial share of future tower roll-outs.

Forecast. Unchanged pending the closure of these proposals.

Reiterate HOLD with unchanged SOP-derived TP of RM4.03 (see Figure #1). We like its regional exposures with focus on emerging countries which may deliver great growth potentials. While we are positive on Celcom-Digi merger allowing Axiata to unlock values, regulatory (especially in Nepal) and economic (in Sri Lanka) risks are major concerns. Other potential corporate exercises that may unlock values include tower asset and digital businesses listings.

Source: Hong Leong Investment Bank Research - 21 Apr 2022