News

Axiata has entered into a conditional agreement with TeliaSonera and SEA Telecom Investments for the 100% acquisition of Reynolds Holding for USD1.365b (or RM5.907b), subject to post-closing adjustments.

Reynolds Holdings owns 80% in Ncell, the number one mobile operator in Nepal, with 13m mobile subscribers (representing 48.8% subscriber market share) and 57.5% revenue market share. It covers c.90% of the population of Nepal with 3G network available in 20 major cities of the country.

The remaining 20% will be owned by an independent party – Sunivera Capital Ventures Pvt. Ltd, which is well versed with the telecommunication industry and regulatory environment in Nepal.

The proposed acquisition which is subject to the approvals from Axiata’s shareholders, BNM and Nepal’s authorities.

The proposed acquisition presents Axiata both a rare and an opportunistic expansion of its footprint in South Asia.

The proposed acquisition price implied EV/EBITDA of 5.0x (based on last 12-month results as of July 15) vs. Axiata’s 8.3x and South Asia and South-East Asia comparable companies’ multiples of 5.7x and 8.4x, respectively. Based on FY14 pro-forma revenue, EBITDA and PATAMI, Ncell would provide an uplift of 9%, 14% and 11%, respectively.

The transaction is expected to be completed by end 1Q or 2Q16 and will not affect Axiata’s dividend policy.

Comments

We are POSITIVE on the proposed acquisition, which could provide immediate earnings accretion to Axiata. On top of that, Ncell’s strong cash-flow generation with FCF of c.NPR22b (or USD217m) in FY July 15, is well positioned to support Axiata’s dividend policy moving forward.

We expect the Ncell’s turnover to grow 12%/11% (mainly underpinned by its healthy voice segment) in FYE-July16/17, respectively, and contribute c.RM2.0b/RM1.0b to Axiata’s turnover/EBITDA in FY16.

The proposed acquisition will be funded through its internal generated funds (USD250m) and USD1.4b debts (which include USD1.0b Sukuk and USD400m bridging loans). Upon completion, the group’s gross debt/EBITDA ratio will likely to surge to 2.5x-2.6x range (from 1.92x as of end 3Q15) but will be lowered to 2.3x- 2.4x range eventually after paring the bridging loan within 6-12 months.

Outlook

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

Forecast

We made no change to our FY15 earnings forecast but raise FY16 NP by 9.1% after consolidating Ncell’s contribution (9-month impact).

Rating

Upgrade to OUTPERFROM

Valuation

Raised our TP at RM6.92 (from RM6.09 previously), based on an unchanged targeted FY16 EV/forward EBITDA of 8.4x, representing 5-year average.

Risks to Our Call

Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 22 Dec 2015