Axiata's Indonesian unit is selling a 5% stake in XL for RM423.5m to Ferrymount Investments Limited (FIL), Procap Partners Ltd (Procap) and Tiga Investments Pte Ltd. The price of RM0.79 per share represents a 5% discount over its 1-month VWAP.

Good deal - We are positive on the deal as it will allow XL and Axiata to partner with FIL, Procap and Tiga and access their expertise and experience in digital and technology services. Procap invests in various technology-focused companies based in Indonesia and Southeast Asia, including Provident Growth Fund and the GoTo Group, a “Super App” created from the merger of two prominent Indonesian groups, namely Gojek (Indonesia’s largest on-line ride-hailing, food delivery and digital payments platform) and Tokopedia (Indonesian’s leading e-commerce platform). Procap’s founders also have various other significant investments in Indonesia including Tower Bersama (a telecommunications tower company).

New partners - Meanwhile, Tiga Investments has been an active investor in the technology sector and in Indonesia. Besides, the principals of Procap and Tiga Investments have extensive knowledge, experience, business partnerships, and investments in Indonesia, as well as in global capital markets. The disposal could provide XL with access to the business partnerships of Procap and Tiga Investments and place XL in a better operational footing.

Value creation in digital ecosystem. Through Procap’s and Tiga Investment’s linkages to the Indonesian digital ecosystem, XL will be able to actively engage and further develop its digital and value-added services to offer its current base of 58 million customers.

Earnings Outlook/Revision

The disposal will see Axiata's stake in XL trimmed to 61.5%. Assuming the disposal will be paid in cash, this will lift Axiata's total cash to RM7.4b and reduce gearing level to around 1.8x net debt/EBITDA.

Forecast maintained – We are keeping our FY21 EPS forecast as the deal will have little impact on earnings.

Valuation & Recommendation

Maintain BUY with an unchanged target price of RM4.53 based on Sum-Of-Parts (SOP). We expect earnings growth to sustain given the resilient demand for data and improved profitability from digital services.

Risks include: Covid-19 situation worsens, regulatory development and 5G rollout in Malaysia and slower than expected recovery in Ncell.

Source: JF Apex Securities Research - 28 Sept 2021