Axiata and Telenor have mutually agreed to end the discussions regarding a non-cash combination of their telecom and infrastructure assets in Asia. We are disappointed, but not shell-shocked over the termination of the discussions. We now expect Axiata to refocus on its 2019/20 strategy – with emphasis on profitability growth relative to revenue market share gains; and Digi to concentrate on driving sustainable postpaid, SME growth. In the absence of a value-accretive M&A, we expect Axiata to trade at discount to its RNAV and hence, downgrade Axiata to SELL (from Hold) with a lower TP of RM4.25 (from RM5.20). Elsewhere, we maintain our HOLD rating on Digi but lower our TP to RM4.55 (from RM5.00) after incorporating a lower long-term growth rate due to a lack of long-term growth catalyst.

Axiata and Telenor Do Not Intend to Provide Further Comments

Axiata and Telenor have mutually agreed to end discussions regarding a non-cash combination of their telecom and infrastructure assets in Asia due to the complexities involved in the proposed transaction. Both parties still acknowledge the strong strategic rationale of the proposed combination and do not rule out that a future transaction could be possible. Meanwhile, the parties do not intend to provide further comments.

Back to Square One, Axiata and Digi to Refocus on Core Strategies

For 2019/20, Axiata continues with their “Shifting Gear” strategy with focus on profitable growth and cash generation relative to revenue market share gains. In the longer run, Axiata aspires to become a Digital Champion by 2022, where the group shall transform into a digital technology company, branching out beyond mobile and consumer to home broadband, enterprise, digital and tower. Elsewhere, we expect Digi to continue driving its postpaid, SME growth, and execution of its operational excellence initiatives.

The market was somewhat wary of a possible termination, but we believe the share prices have yet to fully priced in the disappointment

The local press (The Star, The Edge) had in late August and early September published several articles on a possible abortion of the AxiataTelenor merger. As such, we believe that investors are somewhat wary of a possible termination, but the share prices have yet to fully price in the disappointment. To recap, Axiata’s share price has rallied by 20.8% since the announcement of a possible business combination while Digi has gained 8.2%. In comparison, the KLCI has slipped by 2% over the same period.

Maintain HOLD on Digi With a Lower TP of RM4.55 (from RM5.00)

We maintain our earnings forecasts for Digi but cut our DCF-derived target price to RM4.55 (from RM5.00) after incorporating a lower long-term growth rate of 1% (from 1.5%). In the absence of M&A driven growth, we now project Digi’s long-term growth rate to be similar to Maxis’ 1%. At 26x 2020E PER, Digi’s is trading close to its 5-year average PER of 25.2x, looks fair.

Source: Affin Hwang Research - 10 Sept 2019