edotco is entering Pakistan’s telco tower market via a proposed acquisition of Tanzanite Tower (Private) Limited for a total cash consideration of USD90m. We are NEUTRAL on the proposed acquisition due to the lack of information. All in, we are keeping our Axiata’s FY17E/FY18E earnings forecasts unchanged. We reiterate our MARKET PERFORM call on Axiata with an unchanged SoP-driven target price at RM4.70.

Acquire tower company in Pakistan. edotco Pakistan (Private) Limited, a wholly owned subsidiary of Axiata, has entered into an agreement with Tower Share (Private) Limited to acquire 100% of its subsidiary, Tanzanite Tower (Private) Limited (“TTPL”), for a total cash consideration of USD90m (or c.RM385.4m). The deal will be funded through internally generated funds and is set to be completed by 3Q17. The transaction values TTPL at an enterprise value of USD90m or EV/tower of USD128k.

Details of the proposed acquisition. The transaction is scheduled to be completed only upon receipt of relevant regulatory approvals not later than 3 months from the date of the SPA or such later date as the parties may agree. Besides, the cash consideration of USD90m shall be adjusted based on the net cash, debt and working capital position of TTPL at completion with all right, title and interest free from all encumbrances and pre-emptive rights.

TTPL is in the business of telecommunication and infrastructure service. It has a sizeable tower portfolio of approximately 700 towers with strategic split of approximately 97% urban and 3% rural. The group has a tenancy ratio of 1.4x and providing tenancies to all major mobile operators in the country. Financial performance wise, Axiata is reluctant to share any colour at this juncture but highlighted TTPL is EBITDA positive.

Rationale for the proposed acquisition. Axiata believes the transaction will allow edotco to expand its presence in Pakistan with a sizeable tower portfolio. This is in-line with edotco’s plans to scale up its Pakistan operations and become the largest independent tower company in the country.

edotco’s landscape. edotco currently owns 17.4k telecommunication sites (of which c.46% are ground-based sites and c.44% are rooftop stations) and manages 8.3k towers across five markets. It ranked as the 11th largest towerco globally with a tenancy ratio of 1.58x. The group has recorded RM1.2b revenue in end-FY16 with EBITDA margin of c.47%. Since last year, Axiata has monetarised a third of its stake in edotco through a share placement deal to raise USD700m. Axiata still remains as the majority shareholder holding 62.4% of the issued shares of edotco with Khazanah, INCJ, and KWAP collectively holding 37.6%.

Maintain MARKET PERFORM with unchanged TP of RM4.70. We are keeping our FY17/FY18E earnings forecasts unchanged in view of the limited financial information available at this juncture. Maintain MARKET PERFORM call on Axiata with an unchanged SoP-driven target price at RM4.70. Key downside risks include keener competition, tax and regulatory challenges; upside risk is stronger-than-expected recovery at Celcom and XL.

Source: Kenanga Research - 21 Jun 2017