The merger values Celcom at 9.4x forward EV/EBITDA, which we deem as fair. Axiata’s stake in Celcom Digi Berhad (CDB) lifts its Malaysian CellCo profit by 14%. We maintain our FY21E/FY22E Axiata estimates for now and will update the estimates in due course. We tweak FY22E DPS from 9.0 sen to 10.0 sen. FY21E/FY22E DPS of 8.0/10.0 sen yield 2%/2.5%. Maintain OP with higher SoP-TP of RM4.45 after incorporating Axiata’s equity stake in CDB and rolling forward our valuation to FY22 estimates. Axiata continues to benefit from the regional economic recovery and growing digital services.

Fair value for Celcom. The merger values Celcom at 9.5x trailing EV/EBITDA. Based on our FY22E Celcom EBITDA of RM2.6b, the deal values Celcom at 9.4x forward EV/EBITDA. Given Celcom's relatively lower profitability (est. EBITDA margin of 40% vs. Digi's 49% and Maxis' 44%), we believe the 9.4x is a fair multiple. We see this as a good opportunity for Axiata to partially realize its Celcom investment at a decent valuation.

Earnings accretive by 14%. Axiata's 33.1% stake in CDB and additional interest income of RM60m raises its Malaysian CellCo (from Celcom to CDB)’s FY22 contribution by 14%.

Agreements between Celcom and edotco remain intact. Celcom and Digi may incur one-off transition costs for early termination of contracts with existing vendors and infrastructure suppliers, and it is no exception for Celcom for early termination of contracts with edotco. While Celcom may terminate certain agreements with edotco on sites where Digi also has a presence, we believe Celcom will renegotiate existing contracts on continuing sites as CDB.

Dividends. We take this opportunity to raise our FY22E DPS from 9.0 sen to 10.0 sen, implying DPR of 78% (from 70%), compared to FY21’s DPR of 76%. While we believe the higher dividend is achievable with or without the merger, we believe Axiata’s 33.1% stake in CDB strengthens its ability of achieving that. Applying our new Axiata’s FY22E dividend payout ratio (DPR) of 78%, we estimate Celcom to contribute 5.6 sen DPS to Axiata's 9.0 sen DPS in FY22. Assuming a DPR of 85% for CDB, we estimate Axiata's 33.1% stake entitles it to a dividend of RM582m, translating to DPS of 6.4 sen, raising Axiata’s DPS by 1.0 sen.

Rationalization of competition. The industry consolidation in Malaysia and Indonesia should continue to rationalize competition in both highly competitive markets. That said, … (Refer overleaf for more)

Maintain OP on higher SoP-driven TP of RM4.45 post including Axiata's 33.1% equity stake in CDB. Note that we have applied a 30% holding company discount on CDB's equity value, as investors have the alternative to gain direct exposure by buying CDB shares on Bursa. We have rolled forward the valuations to FY22 EBITDA estimates across the OpCos, save for Indonesia, where we continue to use DCF valuation. In the near term, we believe Axiata will continue to benefit from: (i) recovery of regional economies, (ii) new L900 spectrum in Nepal, and (iii) improving profitability of ADS. In the long term, we like: (i) its enterprise and FTTH growth in regional markets, (ii) growing profit contribution from ADS, and (iii) aggressive growth of edotco.

Rationalization of competition. The industry consolidation in Malaysia and Indonesia should continue to rationalize competition in both highly competitive markets. That said, we believe the key driver for CDB's growth continues to be its enterprise and FTTH segments. Leveraging on its experience in Malaysia and knowledge from Telenor, the CDB merger could expedite Axiata's learning in servicing enterprises in its regional markets too.

Risks to our call include: (i) the proposed merger failing to obtain the necessary approvals, (ii) worse-than-expected service revenue, (iii) stronger-than-expected OPEX, and (iv) stronger-than-expected competition.

Source: Kenanga Research - 22 Jun 2021