Axiata's 63% subsidiary edotco proposed to acquire Touch Mindscape (TMs). edotco looks to grow its towerco market share through the deal, which involves c.1k towers. The deal implies an EV/EBITDA of 13x, at a premium due to scarcity of available towers and TMs’ attractive tenancy ratios. Likely 85% debt-funded, the deal has an insignificant earnings impact on Axiata Group’s FY22E earnings. Additional debt weighs on edotco’s EBITDA accretion, insignificantly impacting TP. Thus, we maintain MP with SoP-TP of RM4.20.

Not surprised. We were not surprised by this announcement as edotco is clear that they will grow organically or inorganically to be the Top 5 globally and Top 3 in Asia in terms of tower count by 2024. The RM1.7b purchase price is slightly lower than the rumored RM1.8b TMs had asked for. The 1,000 towers# in the deal is more than our initial assumption of c.460 towers.

Rationale for acquisition. We believe edotco's main rationale for this acquisition are: (i) for the aforesaid 2024 goals, (ii) to grow its towerco market share in Malaysia from 21% to 25%, and (iii) to ride on the continued growth in demand for telco infrastructure, namely tower and fiber, for 5G rollout. (refer overleaf for more)

Higher Tenancy Ratio = Higher EBITDA margin. We gathered that OCK earns a 70% EBITDA margin from tower leasing in Malaysia, with a tenancy ratio of 1.1x. Meanwhile, edotco, with a M’sian tenancy ratio of 1.99x, derives EBITDA margins from 55% to 65%, which accounts for regional towers too. TMs’ towers in Pahang, Negeri Sembilan and Melaka fetch tenancy ratios of 2.4x, 3.6x and 3.3x, respectively. Thus, we believe TMs likely fetches an EBITDA margin >70%.

Paying a premium. Our bull/base/bear case estimate for TMs’ EBITDA margin are 80%/75%/70%. These scenarios imply EV/EBITDA of 12x/13x/14x, respectively. These multiples are at a premium compared to the 7x we ascribed OCK and 9x we ascribed edotco. We suspect that edotco is paying said premium due to: (i) a scarcity in towerco acquisition targets, and (ii) TMs’ attractive tenancy ratios. While it is not fair to compare the valuation multiples of regional towerco deals, we note that Indonesia's towerco deals have ranged from 10x~15x EV/EBITDA. We think that this premium is justified given the scarcity of for-sale towers in Malaysia and TMs’ attractive tenancy ratios.

85% debt, 15% cash. We assume the RM1.7b deal will be funded with RM1.45b (85%) of debt (as assumed in the Bursa announcement), with the remainder RM250m (15%) in cash. edotco has cash & equivalents of RM1.4b as end-3QFY21, comfortably funding the cash portion of the deal. Assuming an interest rate of 1.96% (as per announcement), the debt brings incremental annual interest cost of RM27.4m.

Insignificant earnings impact. We estimate TMs to achieve a net profit of RM23.3m in FY22. Accounting for the transaction costs of RM1.07m and additional interest cost, the deal will dilute Axiata Group’s FY22E CNP by an insignificant 0.3% (-RM3.3m). Assuming TMs adds 100 towers annually, this deal would start to be value accretive in FY24 with incremental contribution of <RM1m in the initial years. We maintain FY21E CNP but reduced FY22E CNP by 0.3%.

NEUTRAL on the deal. While the acquisition helps edotco take another step towards its 2024 targets, it is earnings dilutive in the near-term. While edotco is paying a premium, we think it is justified given the scarcity of tower assets in Malaysia available for acquisitions. Looking ahead, this could set a precedence for future tower deals to also fetch higher multiples. The additional debt negates the 9% contribution to edotco’s EBITDA, together reducing the TP by 2.0 sens, which we deem as insignificant. Thus, we maintain our MARKET PERFORM call with SoP-TP of RM4.20.

Source: Kenanga Research - 1 Dec 2021