INVESTMENT HIGHLIGHTS

• Axiata is disposing up to 20% stake in Smart Axiata to Mitsui

• Marginal improvement in Axiata’s balance sheet post disposal

• Axiata aims to leverage on Mitsui’s expertise to further strengthen its digital presence in Cambodia

• Maintain NEUTRAL with an unchanged target price of RM4.98 per share

Proposed disposal. Axiata Group Bhd (Axiata) is disposing 10% stake in Smart Axiata Co. Ltd (Smart) to Mitsui & Co. Ltd and its affiliate (Mitsui) for a total cash consideration of USD66m (RM285.7m). In addition, Axiata has also granted Mitsui a call option for USD92.4m (RM400m) to acquire an additional 10% stake which is exercisable within 12 months from the completion of the transaction i.e. end-May 2017. Should Mitsui exercises the call option, Axiata will continues to hold controlling and majority interest in Smart at 72.5%.

Rationale. The disposal proceeds will be used for general corporate purposes and repayment of existing debt. Strategically, the corporate exercise will enables Axiata to tap into Mitsui’s expertise in digital series and Internet of Things (IoT) offerings. This will enables Smart to further strengthen its digital leadership in Cambodia.

Balance sheet impact. As at 31st Dec 2016, the group’s net cash holdings amounted to RM 16,927.5m. Assuming that the whole proceeds will be utilised to pare down existing debt, the net cash position will improves by +4.1% to RM16,241.7m. Despite the exercise being part of Axiata’s portfolio rebalancing strategy, we view that the positive impact on the disposal to the balance sheet is minimal.

EBITDA impact. For FY16, Smart’s EBITDA contribution to Axiata stands at 6.7% or RM538m. Assuming the exercise took place in FY16, Smart’s EBITDA contribution would reduced by -21.6% to RM422m. This would mean that Smart’s EBITDA contribution would form 5.3% of the group’s total EBITDA. As such, the dilution in EBTIDA is negligible as well.

Target price. We are maintaining Axiata’ target price at RM4.98 per share. This is premised on pegging FY17 EBITDA to 7.5x EV/EBITDA, which is the group’s 5-year historical average.

Maintain NEUTRAL. The performance of the group’s main operating segments has been under pressure. 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 factors considered, we reiterate our NEUTRAL recommendation on the stock.

Source: MIDF Research - 22 May 2017