INVESTMENT HIGHLIGHTS

• In-line with our expectation, 1H17 normalised EBITDA improved by +1.2%yoy supported by Ncell consolidation, higher contribution from Dialog, Smart and edotco

• Higher capex planned for Robi and XL in 2H17 to strengthen data leadership and network expansion respectively

• edotco acquire additional 13,000 towers in Pakistan together with its strategic local partner, Dawood Hercules Corporation Limited for a total sum of USD940m

• Maintain NEUTRAL with an unchanged target price of RM5.28

1H17 normalised EBITDA improved further. Axiata’s 1H17 normalised EBITDA grew marginally by +1.2%yoy to RM4,424.6m. The increase was premised on Ncell consolidation, higher contribution from Dialog, Smart and Edotco. All in, this came in within ours and consensus estimates, accounting for 53.3% and 50.7% of FY17 full year EBITDA estimates respectively.

Nonetheless, bottomline remains a concern. Axiata Group Bhd’s (Axiata) reported 2Q17 earnings of RM407.2m. After adjusting for exceptional items amounting to RM54.2m, 2Q17 normalised earnings reduced by –4.8%yoy to RM353.0m. This led to 1H17 normalised earnings of RM644.0m (-22.9%yoy). The reduction in 1H17 normalised earnings was mainly attributable to lower performance from Celcom, dilution from Robi-Airtel merger and IDEA losses.

Capital expenditure (capex) rises further. Axiata’s 1H17 capital spending surged by RM609m or +26.6%yoy to RM2,898m. Higher capex was spent mainly for XL (+51.0%yoy) and Ncell (+784.0%yoy). For 2H17, management guided that FY17 capex will be raised by +10.9% to RM7.1b. The additional capex will be channelled for investment opportunities in data leadership for Robi and network expansion in ex-Java for XL.

Dividend. In 2Q17, the group declared interim dividend of 5sen per share, in-tandem with 2Q16 quantum. This is within our expectation, accounting for 55.5% of FY17 full year dividend estimates of 9sen per share.

Further inroads into Pakistan. To recall, in early August 2017, Edotco Group Sdn Bhd (edotco), Axiata’s 62.4%- owned subsidiary, acquired Tanzanite Tower Private Limited (Tanzanite) and its portfolio of 700 towers in Pakistan for USD88.9m. On 30th August 2017, via Tanzanite, edotco is acquiring Pakistan Mobile Communications Lmiited (PMCL), with a portfolio of 13,000 towers from Deodar Private Limited (Deodar). In addition, edotco Pakistan private limited (EPPL), a wholly-owned subsidiary of edotco, entered into a share subscription and shareholders’ agreement with Dawood Hercules Corporation Limited (DH Corp) who will hold a 45% stake in EPPL as strategic local partner. Upon completion, EPPL will hold a total portofolio of 13,700 towers in Pakistan.

Purchase consideration. The total transaction consideration is USD940m. This will be funded through a combination of external local debt of USD600m and an equity split of USD174m by edotco and USD 166m by DH Corp for their respective stake. The price consideration translates into an implied EV/EBITDA of 8.1x. This is lower as compared to historical average of 10.3.

Rationale. The addition of PMCL will rank edotco as the 8th larget independent TowerCo globally and 2nd largest multi-country Towerco. This is part of edotco’s M&A strategy to be on the top 5 Global Independent TowerCo. However, we view that the acquisition of PMCL will not have material impact on Axiata’s earnings. Note that Axiata’s effective interest in Tanzanite and Deodar stands at 34.3% Based on Axiata FY16 EBITDA, Deodar and Tazanite would provide an uplift of 6.9%.

Impact. No change to our EBITDA and earnings estimates at this juncture.

Target price. We are maintaining our target price of RM5.28 per share. This is premised on pegging FY18 EBITDA to 7.8x EV/EBITDA, which is the group’s 5-year historical average. To recall, we view that our valuation methodology would better reflect the group’s effort to continuously repeat the industry s-curves cycle via active M&A activities.

Maintain NEUTRAL. 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 - 5 Sept 2017