INVESTMENT HIGHLIGHTS

• En route to become a global champion via the merger of Asian operations between Axiata Group and Telenor Group

• Both parties are still in early stage of discussion, to be finalised earliest by 3Q19

• Malaysia is the only overlapping market, with a combined revenue market share of 35%

• edotco to be one of the main beneficiaries due to the enlarged tower portfolio in Asia

• Maintaining NEUTRAL with an unchanged target price of RM3.80 pending the finalisation of the discussion

Teaming up with Telenor group. Axiata Group Bhd (Axiata) is in discussion with Telenor ASA (Telenor) to establish a new merged global entity by combining Axiata and Telenor’s Asian operations within both their ASEAN AND South Asia footprint market. Under the new entity, Telenor will own 56.5% while Axiata will own the remainder 43.5%. Note that the partner also mentioned that there is no certainty that the discussion will materialise. Both will work towards finalising agreements in relation to the proposed transaction within 3Q19 following due diligence.

The proposed entity. The entity will have close to 300m customers across nine countries and approximately 60k towers, making it one of Asia’s largest mobile infrastructure companies. The pro-forma revenue, pre-synergy EBITDA and PAT amounted to RM50b, RM20b and RM4b respectively. Note that Robi (Bangladesh), Idea (India) and Axiata Digital Services are excluded from the proposed merger.

Synergistic value. The merger will allow Axiata to tap in to the expertise of Telenor. Note that Telenor is a global telecom operator, with more than 20 years in Asia and proven track record of delivering cost and efficiency agenda. Furthermore, the merged entity will have better bargaining power in terms of purchasing telecommunication equipments. This could lead to realisation of additional present value upside of RM15b to RM20b. The deal will also improve the strength of the balance sheet, giving it a larger debt headroom for future expansion plan.

Impact to Malaysia operations. In Malaysia, the merger of Celcom Axiata Bhd and Digi.com Bhd (BUY, TP:RM5.06) will lead to pro-forma revenue and EBTIDA of RM14b and RM5b respectively supported by 21m customers. This will make the Malaysian merged entity the largest in the country in terms of revenue, EBITDA and customer base. We view that the merger will allow more flexibility in terms of plans offerings with an upper hand in spectrum portfolio.Enlarging edotco. The merger will also allow edotco to receive the entire tower portfolio under Telenor’s Asia operations. Post consolidation, the enhanced edotco will become the top five global company tower company, possibly in return for share of edotco. Thus, Axiata do not have to source for addition capital to fund edotco’s M&A plan which could further strained its balance sheet.

Impact on earnings estimates. While we view the development positively, we are maintaining our earnings estimates at this juncture, pending finalisation of the discussion.

Target price. We are maintaining our target price of RM3.80. This is premised on pegging FY20 EBITDA to EV/EBITDA multiple of 5.6x which is one standard deviation below the group’s 2-year historical average of 6.8x.

Maintain NEUTRAL. We are positive on the development. The telecommunication industry has been highly competitive. As such, having sizeable presence would provide the group with certain competitive advantages such as economies of scale, better negotiation power in terms of equipment procurement, especially in the case of its Malaysian operation. It also provide the group with a stronger balance sheet to execute future expansion plan as the industry is capital intensive. Nonetheless, the move might trigger regulatory risk, in the case of Malaysia, as well as higher exposure to forex translation risk. Also, we view that the group has to iron out the issue surrounding Ncell which could potentially affect Axiata’s standing in the new merged entity. At this juncture, we are maintaining our NEUTRAL recommendation on Axiata pending finalisation of the development. Nonetheless, we view that it would be in the interest of Axiata that the development materialise.

Source: MIDF Research - 7 May 2019