Axiata has signed the definitive agreements on its record maiden Equity Private Placement Deal of USD600m for disposing 34.1% stake in its wholly-owned tower infrastructure unit – edotco. The deal values edotco’s portfolio at equity value of c.USD1.5b, which we believe is fair. All in, we are keeping our Axiata’s FY16E/FY17E earnings forecasts unchanged for now. We reiterate our MARKET PERFORM call on Axiata with an unchanged target price at RM4.81. Signed definitive pact to sell 34.1% stake in edotco for USD600m. Axiata has announced the signing of the definitive agreements of its record Equity Private Placement Deal of USD600m with Innovation Network Corporation of Japan (INCJ) and Khazanah Nasional Berhad (Khazanah) for primary and secondary edotco shares, respectively. The deal would result in INCJ and Khazanah collectively owning 34.1% stake in edotco, with Axiata remaining the majority shareholder at 65.9%. Axiata is expecting the deal to be completed by end-January 2017. To recap, Axiata has announced entering into a binding term sheet with INCJ (USD400m (or RM1778.20m) committed) and Khazanah (USD200m (or RM899.10m) committed) in mid-December 2016 to sell a yet to be finalised minority stakes in its wholly-owned tower infrastructure unit - edotco.

Values edotco at USD1.5b. Management highlighted that this Private Placement, as concluded by the investors, values edotco’s final portfolio at equity value of close to USD1.5b and an enterprise value of FY16 EBITDA multiple of 12.5x, which we believe is fair and comparable to regional peers. The valuation also takes into account the potential injection of tower assets in Combodia (c.2k towers) and Sri Lanka (c.2.1k towers, pending asset transfer from Dialog) at a later date with resultant increase in Axiata’s shareholding in edotco.

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%.

On track 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. The cost of investment of the Sale Shares is approximately RM273.3m, according to management, thus implying a disposal gain of RM2.4b.

Aspire to be the top 5 global towercos. The proceeds from the share placement 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 intention to become one of the top 5 global towercos. The group need to acquire an additional 10k tower to anchor among the top 10 or additional 15-20k towers to reach the global top 5 position.

Earnings estimate remains unchanged. We made no changes to our Axiata’s FY16E/FY17E earnings forecasts for now, pending the upcoming results release. 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 MARKET PERFORM as the share price has rebounded from its low recently, thus providing limited upside from here.

Source: Kenanga Research - 19 Jan 2017