INVESTMENT HIGHLIGHTS

• Divesting a minority stake in edotco to INCJ and Khazanah

• Axiata is expected to raise up to RM2.7b cash

• Continuous demand for telecommunication tower

• Maintain NEUTRAL with an unchanged target price of RM4.74 per share Cash-raising exercise. Axiata Group Berhad (Axiata) is seeking to divest a minority stake in edotco, its wholly-owned subsidiary, via a primary and secondary equity private placement deal to Innovation Network Corp of Japan (INCJ) and Khazanah Nasional Bhd (Khazanah), amounting to USD400m (RM1.8b) and USD200m (RM0.9b) respectively. The exercise is expected to be completed by 1Q17.

Proceeds. The primary placement proceeds of USD400m will be used by edotco for: i) merger and acquisitions, ii) in-country organic growth opportunities, and iii) repayment of borrowings. Meanwhile, the remainder of the proceeds will be utilised by Axiata for repayment of borrowings and working capital purposes. The proceeds are in line with Axiata’s plan to bring its gross debt-to-ebitda to below 2.5x.

Axiata is still in control. Assuming a minimum stake of 51% postprivate placement, Axiata will remain as the majority shareholder of edotco. Post-private placement, edotco is estimated to have a market capitalisation of at least RM5.5b.

Demand of towers remains robust. Demand of telecommunication tower is expected to remain robust due to: i) spectrum scarcity, ii) telecom operators outsourcing network build, iii) majority of data traffic in mobile due to limited fixed data network, and iv) regulatory regimes promoting infrastructure sharing.

Impact on earnings. We maintain our earnings estimates at this juncture pending further details on the exercise.

Target price. We maintain Axiata’s target price at RM4.74 per share. This is premised on pegging FY17 EBITDA to 7.5x EV/EBITDA, which equates to its 5-year historical average.

Maintain NEUTRAL. We are positive on the private placement exercise as it will partially unlock the value of edotco. Nonetheless, the performance of the group’s main operating segments has been under pressure. Nonetheless, our primary concern lies with Celcom’s future prospects, which is one of the group’s main EBITDA contributors. This is mainly attributable to the heightened price war among its peers. In addition, with the active merger & acquisition activities the group are currently embarking on, we opine that dividend payout could be capped. All in, we reiterate our NEUTRAL recommendation on the stock.

Source: MIDF Research - 14 Dec 2016