We  view  the  move  by  Axiata  to  merge  Hello,  its  Opco  in  Cambodia,  with  the nation's No.2 operator Smart Mobile as logical and timely to cement its position in a  crowded  hyper-competitive  market.  The  deal  should  accelerate  the  pace  ofconsolidation,  with  the  weaker  players  eventually  removed.  While  the  implied valuation  of  >10x  EV/EBITDA  appears  rich,  we  think  this  is  justified  by  Smart's strong market share gains over the past two years. The deal is EPS positive from the onset (+1-2% for FY13). We upgrade our FV on Axiata to RM7.02 after raising our SOP valuation on Celcom. However, we downgrade our call to NEUTRAL from BUY given the stock's strong 10% share price gain in a week.

Getting smart. Axiata is acquiring 100% of Latelz, the owner of the Smart mobile brand in  Cambodia,  and  merging  it  with  its  wholly-owned  mobile  operating  company  (Opco), Hello, which is loss-making. The deal was motivated by the extremely stiff competition in a  crowded  market  where  nine  operators  vie  for  a  population  of  15m  (headline  mobile tele-density  above  100%).  The  acquisition  will propel  its  subscriber  share  to  25%  from 13%  currently  (fourth  place),  behind  the  leader  and  State-owned  operator,  Metfone, which has a 35% share. Most importantly, it solidifies Axiata's position in a consolidating marketplace, allowing the group to gain economies of scale and to extract revenue and cost synergies. We view the in-country consolidation move positively. The transaction is slated to be completed in 1Q2013.

30%+  revenue  share  target.  Axiata  is  targeting  subscriber/revenue  market  shares  of 30%  in  the  longer-term  from  the  merger.  We  think  this  is  an  achievable  target  in  a typically three-player dominated market, as the smaller telcos and green-field operators will  eventually  be  weeded  out  through  a  process  of  M&As  and  terminations.  Although management  did  not  disclose  the  potential  cost  savings  from  the  deal,  we  think  this could  be  significant  as  Smart  is  well-managed  and  adopts  a  low  cost  structure.  We gather that both operators possess complementary brands, which should reduce the risk of  cannibalization.  Revenue  synergies  would,  however,  depend  on  the  dynamics  of pricing  (potential  for  tariff  optimization)  in  a  market  that  has  experienced  substantial value destruction over the last three years. The proforma EBITDA margin of the merged outfit  is  estimated  at  16%  for  1HFY12  based  on  revenue  of  USD45.1m,  which management hopes to improve over time. 

Risks  in  regulatory  framework.  We  believe  there  is  a  lack  of  consistency  in  the management  of  the  scarce  spectrum  resources,  with  allocations  granted  in  a  non-transparent manner in Cambodia. The acquisition of Latelz should minimize the risk and uncertainty  with  respect  to  the  spectrum  as  Hello  operates  on  a  build  transfer  operate (BTO) model while Latelz has a 25-year operating licence.

VALUATION & RECOMMENDATION  

SOP  FV  revised  to  RM7.02.  We  are  applying  a  higher  target  PER  of  16.5x  to  value  Celcom  (from  15x previously)  given  its  strong  operational  execution  YTD  and  our  expectations  that  the  telco  will  report  another strong  quarter  in  4QFY12.  This  bumps  up  our  FV  on  Axiata  to  RM7.02  from  RM6.62  previously.  As  Axiata's share price has rallied over 10% in over a week, we are downgrading the stock to NEUTRAL from BUY.

 Source: OSK