We participated in Axiata’s tele-conference yesterday. Management shared more colours on several topics, which include: (i) domestic spectrums re-allocation plan, (ii) infrastructure collaboration between Celcom & Telekom Malaysia (TM), and (iii) Robi-Airtel merger. There is no change in our FY15-FY16 earnings forecasts for now, pending the upcoming result due on 17th February. We reiterate our OUTPERFORM rating on Axiata with an unchanged target price of RM6.30, based on a targeted FY16 EV/forward EBITDA of 7.8x (-1.0x SD below its 4-year mean).

Spectrum re-allocation – NEUTRAL at best. Axiata believes Celcom’s spectrum holdings in the 900MHz and 1800MHz bands could be reduced under the upcoming spectrum re-allocation plan (where we believe the quantum could be similar to Maxis as its 900MHz and 1800Mhz bands have been reduced by 12MHz (to 2x10MHz) and 10MHz (to 2x20Mhz), respectively) and could lead to higher capex of c.RM1b-2b (as a result of more sites and equipment required) over the next 10 years, assuming no additional spectrum is made available during the period. Meanwhile, the spectrum pricing is likely not to be exorbitant given the authority also recognises that mobile players need to have sufficient capital to introduce and expand their services. To minimise the operational and financial impact, the group will continue to engage with MCMC to: (i) ensure optimal usage of other spectrum bands to offset 900MHz and 1800MHz re-allocations, (ii) fair re-allocation process, (iii) request for early access for technology neutral spectrum (i.e. 700MHz), and (iv) lower annual maintenance spectrum fee under the spectrum assignment in view of its upfront spectrum payment structure (vs. the current apparatus assignment where Axiata had paid RM70m for the 900MHz and 1800MHz usage in FY15). All in all, the spectrum re-allocation plan will have a negative impact to Celcom but neutral-to-slight negative on Axiata due to the latter’s hefty overseas contribution. Having said that, the industry is set to face stiffer competition from 2017 onwards as U Mobile will be allocated additional spectrums.

Collaborative partnership between Celcom & TM. The deal is in-line with Axiata’s strategy to moderately expand the core mobile business into convergence (or fixed mobile convergence (“FMC”)), where management believes could accelerate Celcom’s reach into the emerging FMC segment to up to 25% of total telecom market in Malaysia by 2020. Celcom is targeting to launch its FMC product in 1H16 and believes the infrastructure collaboration will benefit through volume incentives. Capex investments in FY16 are estimated at RM50m-100m with minimal capex in FY17 onwards in relation to this collaboration. On the financial impact front, both Axiata and Celcom are expecting a minimal P&L impact on FY16, mixed for FY17 and positive from FY18 onwards. To recap, the infrastructure collaboration deals are to enable Celcom access to TM’s high-speed broadband infrastructure while TM will tap into Celcom’s vast domestic roaming services through P1.

Robi-Airtel merger. Management remains optimistic on the proposed merger, where the MergeCo will have wider geographic reach with extensive sales and distribution channels. The combined entity will have an extensive reach to 40m customers (from current 28.4m from Robi) and become the number two mobile operator in Bangladesh. The deal is expected to be completed by 1H16. Robi is expecting its revenue to be improved by 20%-25% in FY16 with some compression at EBITDA margin level (due to integration costs). Nevertheless, EBITDA is set to improve from FY17 onwards with positive impact to PATAMI a year later. On the impact to Axiata front, the group is expecting the MergeCo’s PATAMI to be accretive from 2018 onwards. As of 9M15, Robi has contributed 12.9% to Axiata’s total turnover of RM14.5b and RM676m (or 12.7%) at the EBITDA level.

Source: Kenanga Research - 3 Feb 2016