Bloomberg reported that Axiata is seeking to trim stakes in some of its Opcos, a move that could raise as much as USD700m. We were not overly surprised on the report, if materialise, in view of its high financial leverage as well as hefty capex plan ahead. All in, we are keeping our Axiata’s FY16/FY17E earnings forecast unchanged for now, pending management’s clarification. We reiterate our UNDERPERFORM rating on Axiata with an unchanged target price of RM5.19, based on a targeted FY17E EV/forward EBITDA of 6.6x.

Seek buyers for USD700m of overseas holdings. Bloomberg reported that Axiata is seeking to trim stakes in some of its overseas operations in deals that could raise as much as USD700m, people familiar with the matter said. The regional telecom giant is seeking a buyer for about 11% of Indonesian unit PT XL Axiata and planned to dispose as much as 30% each of listed Sri Lanka unit Dialog Axiata Plc and closely-held Cambodian subsidiary Smart Axiata. At present, Axiata owns 66.4% in XL Axiata, 83.3% of Dialog Axiata in Sri Lanka and 95.3% of Cambodian subsidiary Smart Axiata. Meanwhile, Bloomberg also indicated that Axiata which has interests in 10 countries across Asia, will use part of the proceeds from the divestments to cut borrowings, according to sources. Based on XL Axiata/Dialog Axiata’s yesterday closing price of USD0.2002/USD0.078 per share, the group’s Indonesia/Sri Lanka units would have a market capitalisation of USD2.14b and USD634m, respectively. Smart Axiata’s market capitalisation, however, could not be quantified at this juncture due to its unlisted status. On the financial performance front, Dialog/Smart have contributed 12%/5% and 15%/16% to the group’s total turnover/core PATAMI of RM10.3b/RM835m, respectively, in 1H16. XL Axiata, meanwhile, contributed 32% to Axiata’s total revenue in 1H16 but suffered RM70m net loss at the core PATAMI level.

Not a big surprise, overall. While Axiata has yet to response to the news, we were not overly surprised to the asset rationalisation plan, if materialise, in view of its high financial leverage. Axiata’s cash balance stood at RM8.1b with borrowing surging by 31% to RM21.5b at end-2Q16 (from RM16.4b at end-FY15), implying a Gross Debt to EBITDA ratio of 2.46x (based on Ncell’s EBITDA on an annualised basis). The latest gearing is close to its optimal capital structure ratio of 2.5x Gross Debt/EBITDA, thus suggesting limited room to gear further moving forward.

Hefty capex plan ahead. Axiata revised its FY16 capex guidance to RM6.0b (vs. RM5.7b previously) in late-August, with a big chunk of it to be used to improve its network quality in Malaysia, Indonesia and Bangladesh. Besides, the increase, to a certain extent, was also partially due to the preparation of the fee for the Malaysia’s 900MHz and 1800MHz spectrums' structure, which has yet to be unveiled by the authority during that time. Note that, MCMC has subsequently announced the spectrum structure of the above-said spectrums, where Axiata has to pay a total RM1.87b (for 2x10MHz in 900MHz band and 2x20 in 1800MHz) for using these two blocks of bandwidth for 15 years.

Moving forward, we have assumed a similar capex trend in FY17 as the group may need to incur an additional cost due to the impending 2100MHz and 2300MHz spectrum auction in Indonesia. On top of that, the upcoming 700MHz, 2300MHz and 2600MHz spectrum re-allocation in Malaysia could require additional capex to obtain the frequencies' rights. Thus, in view of the hefty capex plan ahead, we do not discount that the group may need to consider asset rationalisation or lower the respective dividend payout to preserve cash.

Source: Kenanga Research - 14 Sep 2016