Axiata plans to sell a minority stake in its wholly-owned tower infrastructure unit – edotco, for up to USD600m to two investors. The proposed deal suggested that edotco could be potentially worth up to USD6b, based on our estimation. All in, we are keeping our Axiata’s FY16E/FY17E earnings forecasts unchanged for now. We reiterated our OUTPERFORM call on Axiata (on trading opportunities following the recent sharp drop in share prices) with an unchanged target price at RM4.81.

Signs binding pact to sell stake in edotco for USD600m. Axiata has announced a USD600m Primary and Secondary Equity Private Placement deal by entering into a binding term sheet with Innovation Network Corporation of Japan (“INCJ”, USD400m (or RM1.77b) committed) and Khazanah nasional Berhad (“Khazanah”, USD200m (or RM885m) committed). The announcement, however, did not spell out the equity stake sale arise from the proposed deal. Definitive agreements are expected to be finalised and signed in January 2017 with Axiata remaining as the majority shareholder of edotco post transaction. The group expects the proposed proposals to be completed in 1Q17.

INCJ’s background. INCJ is a Japanese government-backed fund that invests mainly in the technology sector. The fund has a capacity to invest up to c.USD20b and is involved more than 100 deals since being established in July 2009. edotco’s unique portfolio in Asia’s high-growth frontier markets, solid customer contracts, strong management team and its independent operating model are the key factors drawing INCJ’s interest into the deal.

edotco’s landscape. edotco currently owns 17.1k telecommunication sites (of which c.46% are ground-based sites and c.44% are rooftop stations) and manages 8.1k towers across five markets. It ranked as the 11th largest towerco globally with a tenancy ratio of 1.52x. Based on its proforma account, edotco’s revenue has improved by 27% YoY to RM1.1b as of end 9M16 with EBITDA margin being enhanced 550 bps YoY to 46.6%.

Aspire to be the top 5 global towercos. The proceeds from the proposals is set to fund its growth strategies (including expansion within Asia via key acquisitions and further in-country organic opportunities) as well as repayment of borrowings and for working capital purposes. This is not a surprise as edotco has expressed its intention to become one of the top 5 global towercos. The group need to acquire an additional 10k towers to anchor the top 10 or additional 15-20k towers to reach the global top 5 position.

In-road to unlock shareholders’ value. The deal comes at a time when Axiata is considering an initial public offering of edotco in 2018 to unlock the value of its tower and infrastructure assets. Despite the equity stakes for the proposed proposal remaining vague at this juncture, edotco could potentially be valued at between the USD1.2b to USD6.0b range should the proposed deal represent 49% or 10% of edotco’s equity stakes.

Earnings estimate remains unchanged. We made no changes to our Axiata’s FY16E/FY17E earnings forecasts for now, pending the completion of the definitive agreements. We reiterate our Axiata’s target price at RM4.81, based on an unchanged targeted FY17E EV/forward EBITDA of 6.6x, representing an unchanged -1.5x SD below its two-year mean. Maintain OUTPERFORM as trading opportunities could have potentially arise following the recent sharp drop in share prices.

Source: Kenanga Research - 14 Dec 2016