What’s New

• Axiata is selling a 10% stake in its Cambodian arm Smart to Mitsui, a Japanese conglomerate, for US$66m (RM285.7m). The deal includes a call option for Mitsui to purchase another 10% stake 12 months later at US$92.4m (RM400m).

Comment

• The selling price represents a 154% premium judging from Axiata’s investment cost since 1998 for its 92.5% stake in Smart is at RM1.04bn, which translates into a 10% stake costing RM112.32m. The disposal will not result in an accounting gain as it is treated as an equity transaction.

• We are positive on the deal as it frees up funds for Axiata to pare down its debt and ropes in Mitsui as a strategic investor. Smart will be able to leverage on Mitsui’s expertise in digital services and Internet-of-Things.

Earnings Outlook/Revision

• Lower gearing - Axiata’s 4Q16 gearing was at its highest with net debt/EBITDA of 2 times. Assuming the whole RM285.7m is used to repay debt, net debt/EBITDA could fall to 1.9 times and subsequently 1.83 times if the call option is exercised by Mitsui.

• Forecast maintained – We are keeping our EPS forecast for FY17 and FY18 as minority interest and lower contribution from Smart will be offset by lower interest cost.

Valuation & Recommendation

• Maintain HOLD with a target price of RM4.75 based on Sum-Of-Parts (SOP).

Source: JF Apex Securities Research - 22 May 2017