Axiata,  via  a  special  purpose  vehicle,  has  established  a  multi-currency  Sukuk Programme involving the issuance of up to UD1.5bn  (RM4.8bn) in Islamic debt with no fixed tenure. The programme is the first internationally rated Asia Pacific multi-currency Sukuk,  with  Axiata  being  the  first  Asian  telecommunication  company  to  adopt  an innovative funding structure which amongst others, allows airtime credit for on-net calls within  the group's OpCos.  The  Sukuk  has  been  rated  BBB-  by Standard & Poor's and Baa2 by Moody's. 

Capital management for financial flexibility. The Sukuk programme is in line with the group's longer  term  capital  management  roadmap  to  achieve  a  more  optimal  balance sheet,  as  highlighted  in  our  report  dated  18  July.  We  believe  Axiata  is  pre-empting  its future  funding  needs  by  locking  in  an  attractive  Islamic  facility  to  position  for  potential M&As as well as address its overall capex needs. At the same time, the group would be able to expand the portfolio of investors who are able to appreciate the growth potential across its regional assets. We are of the view that the setting up of a unique trust asset sweetens  the  deal,  allowing  the  group  to  further  monetize  its  network  of  assets  across the  region.  The  Sukuk  programme  follows  that  the  local  MTN  Sukuk  with  a  10-year tenure totaling RM2.45bn issued by Maxis in February.

Special  dividend?  While we do not expect Axiata's dividend to surprise in the near term, we do not rule out a more aggressive payout in the longer-term as FCF yields are rising. If half of the proceeds from the Sukuk issuance are returned to shareholders, the group's dividend yield could potentially increase to 9% from 4%, premised on the recurring net earnings payout guidance of 60%.

Gearing  still  optimal.  Assuming  the  full  issuance  of  the  Sukuk,  Axiata's  net debt/EBITDA will increase from 0.5x as at 1QFY12 to 1.2x, while its net gearing will go up  to  0.4x  (from  0.2x),  which  is  still  manageable  and  in  line  with  that  of  its  regional mobile peers. The group's balance sheet and debt position compares favorably with the net  debt/EBITDA  of  SingTel, Asia's largest telecommunications group, of  1.1x  (net gearing of 0.25x) and Maxis' net debt/EBITDA of 1.8x incorporating the recent Sukuk. We expect the funding flexibility to facilitate Axiata's efforts to also improve the return on its invested capital (ROIC), a key KPI upon which management is measured.  

Maintain NEUTRAL, FV RM5.80 based on SOP. We make no change to our forecast for  now.  Axiata  is  trading  at  a  16.3x  FY13  EPS  and  6.2x  FY13  EV/EBITDA,  which  we deem  attractive  but  not  compelling  when  viewed  against  the  risks  that  some  of  its OpCos face overseas. The stock's key re-rating catalysts are: (i) stronger than expected earnings (ii) special dividends, and (iii) improved data traction in Indonesia.

Source: OSK