• Axiata and Telenor Asia are in advanced discussions on the merger of the telco operations of Celcom Axiata (wholly-owned subsidiary of Axiata) and Digi (49%-owned by Telenor Asia)
• We are positive on the proposed merger. We concur with management’s view that the merger should generate business synergies via its enlarged scale, savings on capex / procurements as well as cost optimisations
• We see high likelihood for the merger to materialise and hence, we raise our price targets for both Digi and Axiata. We upgrade Digi, a clear beneficiary from the proposed merger to BUY (from HOLD) but maintain our HOLD rating on Axiata due to its valuation

Axiata and Telenor are in advanced discussions to merge Celcom and Digi

Axiata and Telenor Asia are in advanced discussions on the merger of the telco operations of Celcom Axiata Berhad and Digi. Axiata and Telenor will have equal ownership estimated at 33.1% each in the merged entity, to be named as Celcom Digi Berhad (“Celcom Digi”). As part of the transaction, Axiata will receive newly issued shares in Digi representing 33.1% post-transaction shareholding and cash equalization amount of around RM2bn, of which RM1.7bn to come from Digi as new debt and the balance RM300m from Telenor. Celcom Digi Berhad will continue to be listed on Bursa Malaysia.

Valuation-wise, the Proposal Looks Fair to Both Axiata and Telenor

The proposed transaction values Celcom at c.9x 2021E EV/EBITDA (based on Digi’s current share price) and Digi at 11.7x 2021E EV/EBITDA. These valuation multiples are comparable to our fair-value estimates. Valuation-wise, the proposal looks fair to both Axiata and Telenor.

Broadly, We Are Positive on the Proposed Merger

We are positive on the proposed merger. We concur with management’s view that the merger should generate business synergies via its enlarged scale, savings on capex / procurements as well as cost optimizations.

Upgrading Digi to BUY, Maintain HOLD on Axiata With a Higher PT

We maintain our earnings forecasts for Digi and Axiata but upgrade our price targets for both companies. We value the merged company, Celcom Digi Berhad at RM53.6bn based on a target 2021E EV / EBITDA of 12x – 1SD below Digi’s 9-year average EV/EBITDA and assuming no synergy from the merger. From here, we derive our price targets for Digi and Axiata based on their respective shareholdings and raise Digi’s price target to RM4.60 (from RM3.85) and Axiata’s price target to RM4.00 (from RM3.60). We upgrade Digi to BUY (from HOLD) - Digi’s shareholders should benefit from its valuation premium, merger synergies and higher share liquidity while continuing to enjoy consistent dividends. While Axiata’s (maintain HOLD) shareholders should also gain from the merger synergies and re-rating of Digi’s share price, they may not benefit directly from Celcom Digi Berhad’s dividend stream and the exercise will not fully unlock the value of Celcom.

Source: Affin Hwang Research - 9 Apr 2021