Edotco announced it is buying 80% stake in a firm which has obtained the right to build telco infra in Kedah for RM140m. We are fairly NEUTRAL-to-NEGATIVE on the proposed acquisition due to the lack of available information. All in, we are keeping our Axiata’s FY18E/FY19E earnings forecasts unchanged. We reiterate our MARKET PERFORM call on Axiata with unchanged SoP-driven target price at RM5.35.

Expands tower business in Kedah. edotco, a 63.0%-owned subsidiary of Axiata, is taking up an 80% stake in a private firm – Tanjung Digital Sdn Bhd (“TDSB”), which has obtained the right to build 225 telecommunication infrastructure in Kedah for RM140m. The proposed acquisition price implied a cost per tower of c.RM622k, which is higher than the cost of a new ground based tower in Malaysia (of c.RM300k) that estimated by TowerXchange.

Who is TDSB? TDSB is a private company limited by shares incorporated in Malaysia on 5 April 2011. The issued share capital of TDSB is currently RM100,002 comprising 100,002 ordinary shares. In 2017, the State of Kedah granted TDSB the rights for the construction of telecommunication infrastructure in the state. At present, Utara Jernih has a 64% stake in TDSB, while Mohd Azam has 36%. A quick check through the SSM indicated that TDSB’s principal activities are mainly in: (i) maintaining and repairing computer hardware, (ii) housing and property development, and (iii) general trading. Its financial performance, meanwhile, was inconsequential given the group barely had any business activity over the past five years, according to the latest filling in SSM.

Rationale for the proposed acquisition. The deal is set to allow edotco to expand its presence in Kedah with a sizeable portfolio of approximately 225 towers. This opportunity is also in-line with the group’s plans to scale up its operations in Malaysia, especially with respect to the build to suit rights in Kedah. Besides, the deal also put edotco in a strong position to accelerate its tower build-out and offer more access to customers, according to the group.

edotco’s landscape. edotco is expected to operate a combined c.40k (of which 32k towers were owned) tower portfolio in six countries post the completion of its acquisition in Deodar, Pakistan. It ranked as the 8th largest towerco globally with a tenancy ratio of c.1.57x (as of endFY17). Axiata remains as the majority shareholder, holding 63.0% of the issued shares of edotco with Khazanah, INCJ, and KWAP collectively holding 37.0%.

Financials. The proposed acquisition will be funded via internal funds, of which c.RM25m shall be for the sale shares and RM115m for the redemption of funding facility in TDSB. The deal is not expected to have any material impact to Axiata’s earnings, gearings and net assets in FY18, according to management.

Maintain MARKET PERFORM with unchanged SoP-driven TP of RM5.35. We are keeping our FY18/FY19E 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 RM5.35. 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 - 7 May 2018