Axiata and Digi’s share prices fell by 16% and 6% respectively following the termination of their merger discussion. Based on our conversations with >10 fund managers / analysts, we sense that investors were highly disappointed with the aborted deal. While surprised with the magnitude of decline in Axiata’s share price, none of them are too eager to bargain hunt. On the contrary, we sense that investors are likely to reduce their holding in Axiata on any relief rally. Elsewhere, investors are holding on to Digi for its 4% dividend yield despite a lacklustre growth outlook. Following the price retracement, we upgrade Axiata to HOLD (from Sell) with an unchanged TP of RM4.25. Maintain HOLD on Digi with an unchanged TP of RM4.55.

Axiata and Digi’s Share Prices Take An Expected Beating

The investment community has reacted negatively to the termination of the merger discussion:

• Based on the data from Bloomberg, half of the 16 analysts who published their updates on Axiata (post announcement) had downgraded their recommendations – six to SELLs (including Affin Hwang) and two to HOLDs. The median TP for Axiata was lowered to RM4.60 from RM4.95. Digi fared better, with two analysts (out of eleven who published their updates) downgrading it to HOLD (from BUY) while the median TP was lowered to RM4.70 from RM4.78.
• Investors reacted negatively to the news. Axiata’s share price fell by 15.8% to RM4.11 (lowest since the announcement of a possible merger) while Digi’s share price declined by 5.9% to RM4.60.

For Now, Investors Are Not Looking to Bargain Hunt for Axiata Shares

We interacted with >10 fund managers / buyside analysts today. Most investors expressed their disappointment over Axiata’s poor guidance in relation to the merger discussion. While some are surprised by the magnitude of the share price decline, none of them are keen to buy into Axiata, even after the sharp retracement in share price. Nonetheless, most investors are not keen to sell their shares at the current price level either. We sense that their reluctance (to dispose) is largely due to the sharp price decline, rather than confidence over Axiata’s earnings / business outlook. A few investors cited benchmarking or a lack of big cap alternatives as the reason to hold on to the stock. We sense that investors may reduce their holdings on Axiata on any relief rally.

Holding on to Digi for Dividend Yield

Investors are less critical of Digi’s management. Most of them are willing to hold on to Digi for its dividend yield. We sense that investors are not eager to increase their positions due to a lack of earnings growth but may reconsider should there be further price weakness.

Upgrade Axiata to HOLD on Price Weakness

We are upgrading Axiata to HOLD (from Sell) with an unchanged 12- month target price of RM4.25 based on a 10% discount to our SOTP valuation (Fig 5). We believe the steep decline in Axiata’s share price has largely priced in investors’ disappointment on the termination of the AxiataTelenor merger discussion. Upside risks to our HOLD rating on Axiata are stronger-than-expected overseas earnings and the undertaking of valueaccretive M&As. Downside risks are earnings disappointments and overinvestment in business ventures with a long gestation period.

Maintain HOLD on Digi With An Unchanged TP of RM4.55

We maintain our HOLD rating on Digi with an unchanged DCF-derived target price of RM4.55. At a 24.5x 2020E PER, Digi is trading near its 5- year average of 25x, looks fair. Digi’s attractive dividend yield of 4.1% should compensate for its lacklustre earnings growth. Key upside / downside risks to our call on Digi are stronger / weaker-than-expected profit growth.

Source: Affin Hwang Research - 11 Sept 2019