Edotco announced it will partner with Dawood Hercules to acquire the tower assets of Pakistan Mobile Communications for USD940m. We are NEUTRAL on the proposed acquisition due to the lack of available 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 RM4.80.

Expands tower business in Pakistan. edotco, a 62.4%-owned subsidiary of Axiata, is buying 13k towers assets, bringing its total assets to c.32k, in Pakistan for USD940m. The price is fair considering its implied EV/EBITDA of 8.1x which is competitive when compared to Asian (10.0x) and multi-country (17.6x) trading and transaction's multiples. Meanwhile, when comparing the cost per tower, the implied USD72k is lower than the average tower deals in Asia (for 2008-2016) of USD140k (Figure 3 & 4). The proposed acquisition is expected to be completed by 4Q17.

Transaction details. edotco through Tanzanite Tower Private Limited (a wholly-owned subsidiary of edotco Pakistan Private Limited (“edotco PK”)), has entered into an agreement with Pakistan Mobile Communications Limited (“PMCL”) to acquire its tower subsidiary, Deodar Private Limited (“Deodar”) and its portfolio of over 13,000 tower assets (c. 32% tower market share) with PMCL as anchor tenant. PMCL is Pakistan’s largest and top mobile network operator (under Jazz brand) with over 53m subscribers (c.37% market share). Subject to relevant regulatory approvals, edotco will own 55% in EPPL (which owns Tanzanite and Deodar controlling a combined tower portfolio of 13.7k with c.1.4x tenancy ratio) post completion with the remaining 45% stake held by its strategic local partner - Dawood Hercules Corporation Limited (DHCL). (Figure 1)

Rationale for the proposed acquisition. The deal is set to strengthen edotco’s leadership position in Pakistan as the largest independent Towerco. With the high-quality portfolio anchored by the top operator, edotco is confident of enhancing operational capability further via leveraging on its existing track records in managing c.26k towers regionally.

edotco’s landscape. Post completion, edotco is expected to operate a combined c.40k (of which 32k towers were owned) tower portfolio in six countries. It ranked as the 8th largest towerco globally with a tenancy ratio of c.1.5x. Axiata remains as the majority shareholder holding 62.4% of the issued shares of edotco with Khazanah, INCJ, and KWAP collectively holding 37.6%.

Financials. Of the deal price, USD600m will be paid for with loans. The balance USD340m will be raised through shareholders’ equity in the ratio for 51:49 for edotco and Dawood. The deal is expected to provide immediate earnings accretion to edotco and Axiata group as well as not affecting the latter’s dividend policy, according to management. For illustration purpose, the deal would provide an uplift for Axiata’s FY16 revenue/EBITDA/PATMI by 6.2%/6.9%/3.2%, respectively.

Maintain MARKET PERFORM with an unchanged TP of RM4.80. 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 RM4.80. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; while upside risks are: (i) stronger-than-expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 05 Sep 2017