Journey to Wealth
Axiata Group: Bringing Tower Assets Under One Roof
THE BUZZ
Axiata Group is reportedly in talks with its India partner and Idea Cellular (Idea)'s majority shareholder, Aditya Birla group, to form a transnational tower company with operations in South-East Asia. Axiata wants to acquire or merge over 8,000 of Idea's towers as it looks to create a unified tower company across 7 nations. Although the details are sketchy, we view the move to consolidate its tower assets positively given its large regional footprint, the potential of unlocking the value of the infrastructure assets across its OpCos and other synergistic monetization opportunities. The key execution risks are regulatory issues across multiple jurisdictions, Idea's buy-in and the challenges facing the tower business in India. We are keeping our NEUTRAL call on the stock, based on a SOP-derived FV of RM5.80.
OUR TAKE
A good move, albeit difficult to execute. The move to consolidate the tower infrastructure across Axiata's OpCos is positive given: (i) the unlocking of value via the spin-off of these assets into a unified tower company, and (ii) the synergies from joint monetisation opportunities. However, given the different regulatory settings across multiple jurisdictions, we think Axiata could face many challenges, including securing the buy-in from Idea, which already has a 16% stake in Indus Towers. While Idea is looking to divest the remaining 8,000 towers (11,000 transferred to Indus Towers), we think it is not likely to transfer the towers at a discount, given the strategic value of these towers to the group. Overall, we think it is still early days as an agreement is yet to be reached. We think that discussions with Idea would have taken into account the proposal by the Telecom Regulatory Authority of India (TRAI) to lower the foreign shareholding cap on tower companies to 74% from 100% currently.Striving to improve opex and capex efficiency. Based on our understanding, discussions have taken place in Sri Lanka, Bangladesh and Cambodia while in Indonesia (XL Axiata), the group has not ruled out the disposal of its towers if the price is right. XL was the earliest to put its towers up for sale in Indonesia and is currently monetizing its towers via network sharing with Hutchison and Axis. In Malaysia, Axiata's wholly-owned Celcom has teamed up with DiGi for passive infrastructure sharing, which would yield substantial capex and opex savings over the next 10 years. Axiata has guided for a group capex of RM4.4bn for FY12, the bulk of which would come from XL, which is front-loading its capex to position for the strong data growth in Indonesia.
Going for scale. Axiata would be up against notable tower companies, which are some of the world's largest, should the deal come to fruition. There are over 10 tower providers in India, both telco-backed and independent entities, with the top 6 making up 90% of the market as shown in Table 1. The leading operators are Indus Towers, Viom Networks (formerly QTIL), Bharti Infratel, Reliance Infratel and GTL. Indus Towers, in which Idea has a stake, owns 112,000 towers in 16 circles in India and is the largest tower company in the world. According to the GSM Association (GSMA), the number of towers in India is estimated to rise by 19% to some 470,000 by 2015, with the main growth coming from grid connected sites.
Tower industry not as lucrative as before. While the tower business in India had attracted a steady stream of foreign investors in the past given its robust potential as well as compelling valuations, the sector's prospects have been dampened by operators' high running costs and ballooning debt. Diesel, a key cost component, has risen by over a third in the past 2 years, with operators also having to bear the brunt of diesel pilferage. The recent cancellation of 2G spectrum by the government has led to mobile operators holding back their investments, which is negative for tower companies.
Axiata remains a NEUTRAL. While we like management's plan to consolidate its tower assets given the potential to unlock value, we think the deal may be difficult to execute due to multiple regulatory issues across jurisdictions. Also, pricing could be a stumbling block for Idea's towers, thus making it difficult for Axiata to combine the assets.
We maintain our Neutral recommendation on Axiata based on a SOP-derived fair value of RM5.80. The upside on the stock is likely to be capped by: (i) regulatory risks across its key India and Bangladesh markets, (ii) rising competitive risk in Malaysia, and (iii) the depreciation of the currencies of its major OpCos. India, Bangladesh and Malaysia constitute 60% of Axiata's core earnings and 72% of our sum-of-the-parts (SOP) valuation on the stock. The re-rating catalysts are: (i) stronger-than-expected earnings going forward, and (ii) capital management. While we are positive on Axiata's longer term fundamentals, we prefer TM for its exposure to Malaysia telecoms as the group is executing well at home and is shielded from external risks.
Source: OSK
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