Sector Update

Axiata and Telenor have entered into advanced discussions to merge their Malaysian operations, namely Celcom and Digi. The merged entity will be named Celcom Digi Bhd with Axiata and Telenor both holding 33.1% respectively and the balance 33.8% to be owned by Digi’s remaining shareholders, namely EPF with 9.8%, PNB with 7%, KWAP with 2.4% and public shareholders with 14.6%. Under the merger, Axiata will receive RM2b cash (RM1.7b from Digi and RM0.3b from Telenor).

The proposal to merge the Malaysian operations came almost 2 years after an initial plan to combine their Asian telecom and infrastructure assets. To recap, in May 2019, Axiata and Telenor entered talks to combine their Asean and South Asian operations. The mega-merger would create a telecommunication giant with combined subscribers of 269m in 9 countries, revenue of RM48b, EBITDA of RM20b and PAT of RM4b. However, the merger was called off in September 2019.

Operation-wise, the Celcom-Digi merger would result in Malaysia’s largest telecommunications company with combined subscribers of 19m, revenue of RM12.4b and EBITDA of RM5.7b based on 2020 numbers. We are positive on the deal as the enlarged entity would increase market dominance and larger cashflow from cost savings through lower capex and combined procurement.

However, we are concerned about obtaining government approval as MCMC will decide whether Celcom and Digi’s merger would curtail competition based on its Guideline on Substantial Lessening of Competition 2014. Among the top 3 mobile operators, Celcom and Digi would have a combined market share of 67% of mobile subscribers and 58% of revenue.

In the previous merger talks in 2019, Axiata’s management noted that the merged company will only hold 35% revenue share of the larger converged telco market which includes broadband players like Telekom Malaysia and TIME.com.

Pending due diligence, both parties expect to finalise the agreement by 2Q21. Hence, we are keeping our recommendations on Axiata (BUY, TP: RM4.53) and Digi (BUY, TP: RM4.23) until further details.

Source: JF Apex Securities Research - 9 Apr 2021