Mitsui Co Ltd and its affiliate have emerged as a strategic partner in Smart Axiata following the purchase of 10% stake for RM285m. Besides, the deal also granted Mitsui a call option to acquire an additional 10% interest within the next 12 months post the completion. All in, we are keeping our Axiata’s FY17E/FY18E earnings forecasts unchanged, pending on the upcoming result release. We reiterate our UNDERPERFORM call on Axiata with an unchanged SoPdriven target price at RM4.78.

New strategic partner in Cambodia venture. In a filing with Bursa Malaysia on last Friday, Axiata said its 92.5%-owned Cambodian subsidiary, Smart Axiata Co., Ltd (“Smart”) has entered into a definitive agreement with Mitsui and its subsidiary M&Y Asia Telecom Holdings Pte Ltd (MY Asia) to dispose 10% stake in Smart for USD66m (or RM285.54m). The agreement also granted Mitsui a call option to acquire an additional 10% within the next 12 months (post completion the transaction) for c.USD92.4m. Through the deal, Mitsui will appear as a strategic partner, with expertise in the Internet of Things (IoT) and help Axiata leapfrog its digital leadership in the fastgrowing Cambodian telecom market. Post-transaction, Axiata will continue to hold controlling and majority interest in Smart with 82.5% stake. The transaction is expected to close by end-May 2017.

Mitsui, a listed company in Toyko, Nagoya, Sappora and Fukuoka, is primarily involved in six major business areas, namely, metals, machinery & infrastructure, chemicals, energy, lifestyle and innovation and corporate development. It has over 130 offices with 16 headquarters business units and 3 regional business units in the Asia Pacific, Americas, EMEA (Europe, the Middle East and Africa).

Smart is the first mobile operator in Cambodia to provide full 4G services covering all 25 provinces throughout the country with over 8m subscribers and a population coverage ratio of more than 98%. The group has reported a revenue/EBITDA/core PATAMI of RM1.09b/RM538m/RM259m, respectively, in FY16.

Rationale for the proposed disposal. Axiata believes the deal meets its portfolio management strategy and brings financial value for the group and its shareholders, with the proceeds intended for general corporate purposes and repayment of existing debt in its balance sheet. Besides, with Mitsui in the fold, Axiata believes Smart will be in a position to offer enhanced digital services that would leapfrog Cambodia’s digital economy and further strengthen the group’s leading mobile operator position in Cambodia.

Basis and justification for the transaction. The consideration for this transaction, said Axiata, was based on an equity value of USD724m (or RM3.13b) after factoring additional cash received from dividends as part of the transaction structure. The deal also implied an EV/historical EBITDA ratio of 5.8x, which is in-line with our expectation. Note that, the total investment cost of Axiata’s 92.5% stake in Smart is approximately RM1.04b.

Earnings estimate remains unchanged, pending the upcoming result release on 25th May. We reiterate our UNDERPERFORM call on Axiata as we believe the group may face another tough year ahead as a result of heightened competition, tax and regulatory uncertainties in its key OpCos. Our SoP-driven target price stays at RM4.78. To illustrate the divestment impact, the disposal is expected to lower our SoP-driven target price by 3.0 sen to RM4.75

Source: Kenanga Research - 22 May 2017