News

Axiata announced that its wholly-owned subsidiary, edotco Group S/B has entered into a share purchase agreement with Digicel Group Limited (Digicel) to acquire a 75% equity interest in Digicel Asian Holdings Ptd Ltd (DAH), the parent of Digicel Myanmar Tower Company (MTC) for USD221m.

The transaction will be settled via cash on a cash-free and debt-free basis which based on the expected closing date of Nov 30, is expected to be approximately USD125m (c.RM551.3m).

The transaction is subject to customary closing conditions, including: (i) the approval of the government of the Republic of the Union of Myanmar (consisting the Post and Telecommunications Department), BNM, and the consent of YSH Finance Ltd and the minority shareholders of DAH.

Rationales for the transaction include: (i) providing Axiata additional revenue streams apart from the core mobile business, (ii) to further solidify edotco as a leading infrastructure provider to the greater Southeast Asian telecommunications industry, and (iii) to allow edotco to expand its footprint beyond Axiata Group’s existing operations.

Comments

We are NEUTRAL on the proposed acquisition. While we concur with the management that the Myanmar telecommunication industry (with its low mobile penetration and high reliance on tower and infrastructure sharing) could present a significant potential for edotco’s business, the country high political risk (as its military continues to dominate politics) could somehow limit its growth prospect.

Axiata 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 acquisition materialize.

We understand that MTC has signed an agreement in 2013 with Ooredoo to develop, construct and lease 1,250 telecommunications towers in Myanmar.

Edotco, which was established by Axiata in 2012, is currently managing c.14k towers in countries like Malaysia, Bangladesh, Cambodia, Sri Lanka and Pakistan.

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

Maintaining our TP at RM6.05, based on an unchanged targeted FY16 EV/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 - 5 Oct 2015