News   The media reported that the Myanmar government had issued a notice yesterday to invite all investors to express their interest (by Jan 25th) in two new telecom licences. 

 The tender bid is expected to open in February with the licences expected to be issued by the end of June.

 The licences to be issued will be for a 10-to-20 year period with players required to commit on providing reasonable tariffs and low initial registration fees to facilitate the accessibility and increase the tele-density targets in both the rural and urban centres. 

 The Myanmar government's objective is to increase the overall tele-density rate to 75%-80% by 2015-2016.

 Alongside Axiata, it was reported that several telcos from Europe, China, Japan and even Singapore were also set to express interest on the two licences.

Comments   Myanmar has a population of 60.3m, two times larger than Malaysia, and its telecommunications sector is dominated by the state-owned monopoly telephone service provider, Myanmar Posts and Telecommunications (MPT). With the military government's conservative approach to structural reform, it would not be surprising that MPT will continue to maintain its monopoly on the sector. 

 Based on our understanding, the mobile penetration rate in Myanmar was estimated at approximately 9%, thus suggesting that there is ample room to grow for newcomers to the sector. Nevertheless, the new investment opportunity may also come with some unforeseeable risks given that the political situation in Myanmar is still uncertain, at least in the short to medium term. 

 Funding is not an issue in our view should Axiata manage to penetrate into this new market. As of 3QFY12, Axiata has a cash pile of RM8.6b with a gross debt/EBITDA ratio of 1.8x. The ratio is still below its optimal capital structure of 2.0-2.2x gross debt/EBITDA level, which suggests that Axiata still has room to leverage up its balance sheet if needed. We estimate that Axiata can raise up to RM3.1b if the company decides to maximise its optimal capital structure.

Outlook   The group's outlook has improved somehow recently despite the competitions at both its local and overseas ventures continuing to remain strong. Nevertheless, the prolonged regulation issues in both India and Bangladesh may continue to put barriers in its operations going forward. Furthermore, the expected continuing strengthening of Ringgit Malaysia, following the release of QE3, may result in the group bearing some currency translation losses going forward.

  

Forecast     No changes in our FY12-FY14 earnings forecasts. 

Rating   Maintain MARKET PERFORM

Valuation   Maintaining our target price at RM6.81 based on an unchanged targeted FY13 EV/forward EBITDA of 8.3x (+2SD). 

Risks   Regulation risks in its overseas ventures.

Source: Kenanga