Axiata's 63% subsidiary edotco has proposed to acquire 2,973 telecom towers and related assets via its wholly owned subsidiary in the Phillipines through a sale and leaseback transaction with the subsidiaries of PLDT Inc for a total consideration of PHP42b (equal to USD800m or RM3.42b). The deal implies an EV/EBITDA of 15x at a premium as the acquisition will make edotco the leading independent tower company (ITC) with 3,073 towers in the Phillipines. As the acquisition is scheduled to be completed by end of FY22, we maintain our OP call and SoP-TP of RM4.30.

Not surprised. We were not surprised by this announcement as edotco is clear that they will grow either organically or inorganically to be the Top 5 globally and Top 3 in Asia in terms of tower count by 2024. The RM3.42b purchase price implies an EV/EBITDA of 15x – higher than its acquisition of Touch Mindscape (TMs) recently at 13x EV/EBITDA but cheaper overall as the TM acquisition involves c.1,000 towers vs. PLDT’s c.3,000. In addition to the sale and leaseback of the towers, PLDT has also committed to place orders for an additional 750 towers. Post transaction, edotco will own and manage a total of 54k telecommunication infrastructure assets.

Rationale for acquisition. We believe edotco's main rationale for this acquisition are: (i) for the aforesaid 2024 goals, and (ii) to ride on the continued growth in demand for telco infrastructure, namely tower and fiber, for 5G rollout. It is also to: (i) to ride on the Phillipines robust economic growth, (ii) become the leading ITC in the Philippines (>3k towers), (iii) leverage edotco’s operational excellence and innovative infrastructure solutions to unlock synergies, and (iv) enhance the diversification and optimization of edotco’s portfolio.

Improving EBITDA margins. We guesstimate that PLDT earns c.76% EBITDA margin from its tower operations. Illustrative pro-forma indicated an increase of 15% to edotco’s FY21 revenue of RM1.97b while proforma EBITDA margin showed an increase of 180bps to 64.4%. Thus, we believe on a proforma basis, PLDT’s margin are at c.76%.

Premium purchase justified. The purchase implies an EV/EBITDA of 15x. These multiples are at a premium compared to the 7x we ascribed OCK and 9x we ascribed edotco. We suspect that edotco is paying the said premium due to: (i) the opportunity to become the largest ITC in the Philippines, (ii) PLDT’s attractive tenancy ratios (1.3x), and iii) high EBITDA margins. 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 as it moves edotco one step closer become the Top 5 globally and Top 3 in Asia in terms of tower count by 2024.

No change to FY22E earnings. We understand that the RM3.42b deal will be funded by a combination of both internally generated funds and external funding. Proforma illustration indicated the borrowing for the acquisition will add another RM100m in annual funding costs (FY21: RM1.56b) with an additional RM150m in D&A expenses. Accounting for the additional interest costs and D&A expenses, the deal will erode our AXIATA’s FY23 CNP by 7.5% (or RM104m). No changes to our FY22 earnings but revised down our FY23E earnings by 8%.

Positive on the deal. While the acquisition helps edotco take another step towards its 2024 targets, it is earnings dilutive in the near-term but earnings accretive in the mid to long-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 precedent for future tower deals to also fetch higher multiples.

Maintain OUTPERFORM with unchanged TP of RM4.30 based on an unchanged FY22E EV of RM39.5b as the additional debt takes effect only in FY23. This proposed deal strengthens our thesis that Axiata has a lot going on, in its regional and digital businesses, making the stock a good hedge against the uncertain operating environment for local MNOs. Besides, it is still our Top Pick for the Telco sector, as it has the best long-term value proposition against its industry peers.

Source: Kenanga Research - 21 Apr 2022