In our daily highlight on Axiata at the end of last month, Macquarie Equities Research (MQ Research) maintained Outperform on the company as its 2Q19 improved results tracked analysts’ estimates. Last Friday afternoon (6 Sept), the listed companies suspended their shares as Axiata and Telenor called off the merger due to complexities involved. MQ Research sees any weakness in Axiata’s share price on Tuesday (10 Sept) as an opportunity to accumulate its shares.

Event

• MQ Research maintains its Outperform recommendation on Axiata despite the termination of merger talks with Telenor, which was announced on 6 Sept. MQ Research’s Sum of Parts (SoP) derived price target for Axiata remains RM5.47 with no change in its estimates, as MQ Research’s model had NOT incorporated any merger impact. The deal would have been positive for Axiata and DiGi.com (DIGI MK, RM4.90, Underperform, TP: RM4.02), but it appears that Telenor and Axiata could not resolve certain issues resulting in the termination. Interestingly the joint statement by both parties did not rule out future transactions. MQ Research sees underlying improvements at Celcom and XL as key contributors to a 41% FY18-21 core earning compounded annual growth rate (CAGR) earnings at Axiata, and providing valuation support.

Impact

• Focus on Axiata 3.0. On a call to discuss the terminations, management pointed back to their ongoing strategic initiatives (Axiata 3.0) of 1) improving profitability, 2) optimising its portfolio and 3) pursing industry restructuring and rationalisation in the various markets. The increased focus on cost optimisation (including capex) and profitability has already delivered a healthy uptick in 1H19 core earnings and led management to increase its 2019E earnings before interest, tax, depreciation and amortisation (EBITDA) and return on capital employed (ROCE) expectations while lowering capex expectations.
• Industry restructuring and rationalisation opportunities being pursued. Management alluded to the fact that Axiata had been exploring opportunities even as the Telenor discussions were underway. No timeline was provided for further actions, but they did point to opportunities to work with other operators, including DiGi, in Malaysia on network sharing. There was acknowledgement that with the improvements at Celcom, there was no hurry to pursue any mergers and acquisitions (M&A). On a potential re-merger of Celcom with Telekom Malaysia (TM) (T MK, RM3.39, Neutral, TP: RM3.85), management said nothing was on the cards, but Celcom continues to work with TM for its fibre requirements while providing a mobile roaming service to TM.

Action and Recommendation

• Outperform maintained. MQ Research would see any weakness in Axiata’s share price on Tuesday (10 Sept) when it resumes trading as an opportunity to accumulate its shares.

12-month Target Price Methodology

• AXIATA MK: RM5.47 based on a Sum of Parts methodology
• DIGI MK: RM4.02 based on a discounted cash flow (DCF) methodology
• T MK: RM3.85 based on a DCF methodology

Source: Macquarie Research - 10 Sept 2019