News  XL (66.5% owned by Axiata Group) announced the sale of 3.5k towers (c.35% of XL’s existing tower assets) to PT Solusi Tunas Pratama Tbk (STP) for a cash consideration of IDR5.6T (RM1.5b), which implied c. 9x EV/EBITDA.

 Concurrently, XL and STP have also entered into a Master Tower Lease Agreement to lease back the 3.5k towers for a period of 10 years.

 XL has secured preferential lease terms as the anchor tenant with: (i) IDR10m flat monthly rental/tower for 10-year, (ii) no separate Q&M component, and (iii) no escalators (incl. for inflation).

 XL dividend policy (minimum 30% payout ratio) remains unchanged.

Comments  The towers asset disposal is well within management’s earlier guidance. We are positive on the disposal as the price appears fair and could enhance XL’s cost competitiveness further over the long-term. Meanwhile it could also allow the company to free up additional resources and focus on its core business through an asset-light strategy.

 We understand the proceeds will be used for debt reduction and lower its net debt/EBITDA ratio to 2.5x from 3.2x currently. The group currently have Rp30.3T interest bearing debt as of 1H14 of which c.52% were in USD-denominated loan.

 XL’s FY15 EBITDA is likely to be diluted by 200bps (due to higher tower leasing fee), according to management. The higher leasing cost, however, is expected to be offset by lower interest cost as a result of debt repayment.

Outlook  Increasing competition, currency fluctuation and regulatory challenges will continue to be key challenges faced by Axiata’s OpCos.

Forecast  We leave our earnings estimates unchanged as the higher tower leasing cost (in XL) is expected to be offset by the lower interest expenses.

Rating MAINTAIN MARKET PERFORM

Valuation  Maintained our TP at RM6.92, based on a targeted FY15EV/forward EBITDA of 9.1x (+1.0x SD above its 4-year mean)

Risks to Our Call Regulation and currency risks in its overseas ventures.

Source: Kenanga