XL Axiata (“XL”) has announced the sale of 2,500 towers to Protelindo for IDR3.568b (or c.USD267.1m) as well as entered into a Master Tower Lease Agreement to lease back the towers for a period of 10 years. The transaction reinforces XL’s focus on an asset light strategy and allows the group to free up additional resources to focus on its core business. Post-review, we have raised our Axiata’s FY16/FY17E net profit marginally by 0.6%/1.0%. We reiterate our MARKET PERFORM rating on Axiata with an unchanged target price of RM6.10, based on a targeted FY16E EV/forward EBITDA of 7.9x (-1.0x SD below its 4-year mean).

Sale of 2,500 tower to Protelindo – XL, a 66.4% subsidiary owned by Axiata Group, announced that it has signed an Asset Purchase Agreement (APA) with PT Professional Telekomunikasi Indonesia (Protelindo) on 28 March 2015, where the latter has won the tender process of 2,500 telecommunication towers (c. 39% of XL’s existing tower assets) sale by XL, with a purchase price of IDR3,568b (c. USD267.1m @ IDR13,355 per USD rate). Concurrent with the signing of the APA, XL and Protelindo have also entered into a Master Tower Lease Agreement whereby XL will be the anchor tenant for 2,432 towers for a period of 10 years (with an option to renew) with a rate of IDR10m/month per tower. The transaction is expected to be completed by end-2Q16. Meanwhile, XL’s management also intends to maintain its dividend policy, where the group had set to distribute a minimum 30% of its normalised net income to shareholders.

Transaction rationales. The transaction reinforces XL’s focus on an asset light strategy and optimises its balance sheet to reduce leverage as well as further invest in its core network. The group’s net debt/EBITDA stood at 2.8x as of the end CY15 and is expected to lower to c.2.4x post debt reduction from the sale proceeds. On the income statement front, the towers' sale is expected to boost its lease rental expense but mitigated by lower interest costs, depreciation and capex.

Fair transaction price. The tower assets' disposal implied the cost per tower of approximately USD106.8k, which we deemed as fair given that the price tag is not far behind if compared to the average USD102.5k cost per tower deals recorded in Asia during 2008-2015 (source: TowerXchange). The transaction price, however, is c.19% lower as compared to the previous tower sale deal where XL sold 3,500 telecommunications towers for USD460m (or c.USD131.4k/tower) in 2014 to local firm PT Solusi Tunas Pratama.

Positive mid-to-long-term earnings impact. XL’s other telecommunications services revenue (which comprises mainly leased towers, leased lines and national roaming) is expected to come in lower as a result of lesser tower revenue. The group’s operating expense, meanwhile, is likely to increase as a result of the higher rental expenses from network expansion as well as the sale of towers to Protelindo. All in all, XL’s management expects its EBITDA margin to compress by 130bps in FY16 but expect its EPS to be accretive a year later. From Axiata’s perspective, we have trimmed our FY16E/FY17E turnover by 0.3%/0.5% as well as EBITDA by 0.1%/0.3%. Its FY16/FY17 net profit, however, have been raised marginally by 0.6%/1.0% after imputing lower finance costs.

Source: Kenanga Research - 30 Mar 2016