Axiata announced a strategic minority investment by Mitsui into its digital services arm, Axiata Digital Services. We are mildly positive on the investment – it should ease Axiata’s near-term funding pressure and enable Axiata to collaborate with Mitsui’s business units. Elsewhere, we are neutral on the recently announced non-cash transfer of other digital venture assets to Pegasus 7. Overall, we are neutral on Axiata’s digital ventures. While the implied valuation for these digital assets exceeds Axiata’s investment costs, we believe it is premature to raise our valuation in view of the difficulties in monetising its non-core digital assets and lack of financial details on the Mitsui investment. Maintain HOLD.

Mitsui & Co invests in Axiata Digital; Axiata transfers Digital Venture assets to Pegasus 7 Ventures

Axiata announced a strategic minority investment by Mitsui & Co. into its digital services arm – Axiata Digital Services Sdn. Bhd. (ADS). The investment establishes a pre-money enterprise value of US$500m (RM2.07bn) for the core businesses of ADS that include Boost, ada (analytics.data.advertising) and Apigate (an emerging global API platform provider). Separately, Axiata also recently signed up to transfer the rest of its digital portfolio, called Digital Venture (DV) assets, to an investment fund (Pegasus 7 Ventures Ptd Ltd) at a valuation of US$140m (RM580m).

We Are Mildly Positive on Mitsui’s Investment

We are mildly positive on Mitsui’s investment into ADS. The investment should ease ADS’ near-term funding pressure and enable ADS to collaborate with Mitsui’s business units. We understand that Mitsui may invest up to 10% in ADS, valuing the company at pre-money enterprise value of US$500m. However, management has yet to share the transactions details (ie. timing, requirements, current debts level at ADS, revenue / profits of the business units).

We Are Neutral on Transfer of DV Assets to Pegasus 7

Under the deal, Axiata will transfer the DV assets (11street, StoreKing, BIMA, Freedom Pop, etobee) to Pegasus 7 in return for non-controlling preference shares. Axiata will book in an one-off, non-cash profit upon the transaction and cease accounting for any profit or loss from these assets thereafter. Pegasus 7 founder and CEO Gautam Saxena was the former Head of Asia Telecom & Media at Bank of America Merrill Lynch based in Singapore. Pegasus 7 will manage these assets with an aim to exit these businesses within 3 years. Axiata and Pegasus 7 will share the profit upon disposal (if any) at a ratio of 85:15.

Overall, We Are Neutral on Axiata’s Digital Ventures

Notwithstanding Mitsui’s investment, ADS will likely remain loss making in 2019-20E. Management expect ada and Apigate to turn positive by 2020E but Boost may only turn profitable by 2021E. The implied value of these digital assets of US$640m are higher than Axiata’s cumulative digital investment of US$244m. However, we believe it is premature to raise our SOP valuation, given: (i) the monetisation of DV assets look challenging; and (ii) it is difficult to assess the value of ADS due to lack of financial data and absence of transaction details on Mitsui’s investment. Our current valuation for the digital business (US$240m) is comparable to Axiata’s cumulative investment costs.

Maintain HOLD With An Unchanged TP of RM4.09

We maintain our HOLD rating on Axiata with an unchanged 12-month target price of RM4.09 based on a 15% discount to SOP valuation. While we expect gradual revenue gains in its key operating subsidiaries, the stiff competition and regulatory risks may continue to cap earnings growth and weigh on investor sentiment. Upside risks: strong earnings growth of its subsidiaries; downside risk: intensified competition, regulatory risks.

Source: Affin Hwang Research - 6 May 2019