News

Axiata and Bharti Airtel have entered into an exclusive discussion to explore the possibility of combining the business operations of their telecommunication subsidiaries in Bangladesh; namely, Robi Axiata Limited and Airtel Bangladesh Limited.

Nevertheless, there is no certainty that this discussion will lead to the execution of binding definitive agreements between both parties, according to the management.

Comments

We are NEUTRAL on the news due to limited financial information available on Airtel Bangladesh at this juncture.

Axiata has recorded cash balance of RM5.4b and RM14.0b in debts as of end 1H15, translating into a gross debt/EBITDA ratio of 2.03x. As the group has reached its optimal capital structure of 2.0-2.2 gross debt/EBITDA range, there is a limited room for Axiata to gear up should the merger taking place.

Robi has recorded a turnover of RM1.17b with PATAMI of RM80m in 1H15, accounted for c.12.4% and 6.7% to the Axiata Group.

Robi’s subscriber base has improved by 14% YoY to 27.4m in 2Q15 and extended further to 27.9m in July. Together with Airtel Bangladesh, which recorded 9.1m subscribers as of Jul-15, the combined entity will overtake Banglalink (c.32.4m subscribers) and become the 2nd largest carrier in terms of the subscribers’ market share. Grameen Phone, meanwhile, will continue to be the market leader with 54.0m users or 42% subscribers’ market share.

On the other hand, we understand that Bharti Airtel has spent USD300m (translated into 6.88x of TV/EBITDA or 1.28x at the TV/revenue basis) to acquire a 70% stake from Dhabi Group in 2010 followed by another undisclosed amount to acquire the remaining 30% from the latter in the year 2013.

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 RM6.05, based on an unchanged targeted FY16EV/forward EBITDA of 8.6x, representing a 4-year average.

Risks to Our Call

Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 10 Sep 2015