News

Axiata plans to invest $2.6m (c.RM9.9m) for a 70% stake in US-based WSO2.Telco Inc (WSO2T), to form a joint venture leveraging on WSO2’s open source application development software.

The group through its wholly-owned subsidiary - Axiata Digital Services S/B (ADS) has bought 5m common shares at $0.0001/piece and 4.62m preferred shares in WSO2T at $0.39/piece.

Further to the initial subscriptions and subject to WSO2T achieving all its determined key performance indicators on or before the first anniversary of the completion of the initial subscriptions, ADS shall further subscribe in cash an additional 2,051,282 WSO2T preferred stocks at $0.39 per share.

The holder of WSO2T preferred stock is entitled to, from time-to-time, to convert each of the preferred stocks into one fully paid-up share of WSO2T common stock. At full conversion of its WSO2T preferred stocks, ADS will hold 70% of the paid-up capital of WSO2T, the filling added.

The deal will be paid for in cash through internally generated funds.

WSO2T is an open-source application development software company focused on providing serviceoriented architecture (SOA) solutions for professional developers.

Comments

We concur with the management and believe the JV will allow the creation of a new business that is designed to empower global telecommunication operators to partner with OTT businesses by making integration friction-less with lower cost.

Indeed, the JV initiation was first introduced in March during the Mobile World Congress 2015 event when both WSO2 Inc. and Axiata Group launched WSO2.Telco. The platform is basically a cloud-ready, API-driven platform that could empower mobile network operators with an agile collaboration layer for building and leveraging partnerships across the mobile ecosystem.

In view of the relatively small investment, the subscription is not expected to have any material impact to the group’s FY15 earnings.

Outlook

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

Forecast

We leave our FY15-FY16 earnings estimates unchanged.

Rating

MAINTAIN MARKET PERFORM

Valuation

Maintained our TP at RM6.55, based on an unchanged targeted FY16EV/forward EBITDA of 9.2x (+0.5x SD above its 4-year mean)

Risks to Our Call

Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 27 Jul 2015