Axiata XL has proposed to acquire a 66.03% equity stake in Indonesian fixed broadband and Cable TV operator Link Net. Assuming that XL will fund the acquisition at the current market price of IDR4,600 with 90% new debt, and accounting for the additional post-tax interest cost, we estimate that the acquisition would increase Axiata’s FY22E CNP by 2% (+RM26m). Applying a 30x PER (XL’s FY22E) on the incremental earnings, we concluded that the incremental per-share-value for Axiata to be RM0.10 (thus, hypothetical TP of RM4.55). While we are positive on XL’s long-term growth in the Indonesian home market with this acquisition, we think it’s too early for the market to price in incremental earnings beyond FY22. Maintain OP with SoP-TP of RM4.45.

Proposed acquisition. Axiata’s 66.48% Indonesian subsidiary XL has announced its intention to acquire a 66.03% equity interest in Indonesian fixed broadband and cable TV operator Link Net. At this juncture, the purchase price is still unknown (we have assumed IDR4,600), and the talks are not exclusive. Should XL acquire the 66.03% stake in Link Net, it will be required to conduct a Mandatory Tender Offer to purchase the remaining shares of Link Net. Based on our understanding, XL does not intend to delist Link Net.

Strengthens XL’s position in Indonesian homes. Link Net is Indonesia’s second largest fixed broadband operator with 2.7m homes passed and 859k subs, only behind the incumbent PT Telkom’s IndiHome, which has 20m homes passed and 7.8m subscribers. We believe XL’s acquisition of Link Net would allow XL to capture a meaningful share of the Indonesian fixed broadband market. (refer overleaf for more)

XL would need extra debt for acquisition. Based on: (i) Link Net’s latest market cap of IDR13t (66% stake = IDR8.7t), and (ii) XL’s latest cash balance of IDR1.5t, we assume that XL will fund 10% of the acquisition with cash (IDR870b) and the remainder 90% (IDR7.8t) with new debt. Assuming an interest cost of 8%, XL would incur incremental after-tax interest cost of IDR501b or RM143m. The additional RM1.5b of debt on Axiata’s books would raise its net gearing from 0.76x to 0.80x.

Potential impact to Axiata. Accounting for the additional post-tax interest cost, we estimate the deal to increase Axiata’s FY22E CNP by 2% (+RM26m). By applying a PER of 30x (XL’ FY22E) on the incremental earnings, we estimate that the incremental per share value for Axiata is RM0.10, thus its hypothetical post-acquisition TP would be RM4.55.

Maintain FY21E/22E CNP pending completion of corporate exercise.

Maintain OP on higher SoP-driven TP of RM4.45. We are positive on XL’s potential strategic acquisition of Link Net, as it would strengthen XL’s home offerings, also allowing it to potentially offer converged solutions. Moreover, we think that the fixed broadband market in Indonesia has favorable tailwinds of: (i) low penetration rate with ample room for growth, and (ii) strong home broadband demand from working/learning from home. While the acquisition could prove more profitable over the long-run as interest expense falls and profit grows, we think that it is too early for the market to price in any incremental profits beyond FY22.

Source: Kenanga Research - 2 Aug 2021