We view XL’s proposed acquisition of Axis as positive in the  longer term and do not expect Axiata’s earnings dilution to be too significant.  Axiata’s ability to progressively pay more dividends remains intact. For now,  with  no  changes  to  XL’s  earnings  forecasts  and  FV,  Axiata remains a NEUTRAL.  
 
- Positive  on  XL’s proposed acquisition of Axis. We  view  XL Axiata’s (EXCL  IJ,  NEUTRAL,  FV:  IDR4,100)  proposed  acquisition  of  Axis  for USD865m  (RM2.8bn)  as  longer  term  positive  as  it  gives  the  former access to valuable spectrum resources as well as significant capex and opex  savings  (USD400m  capex  savings  in  the  first  five  years  alone), although it may be earnings dilutive to XL in the medium term.

- Axiata’s  earnings  dilution  not  too  significant.  While  Axis  is  loss-making (financials undisclosed), we do not expect a significant dilution in Axiata’s earnings as XL only contributes about 37% to Axiata’s EBITDA. By  consolidating  its  market  position,  cost  synergies  and  integration plans, XL expects Axis to be EBITDA positive by FY15.  

- Axiata keeps its progressive dividend policy. Management said there is  no  change  to  the group’s dividend  policy  despite  Axiata  extending  a shareholder’s loan to XL to part-finance Axis’ acquisition (in combination with  external  debt).  The  exact  proportion  was  not  provided,  but  Axiata has a healthy RM3.1bn cash balance. We keep our MYR0.23 FY13 DPS forecast (assuming 75.0% payout vs 70.0% in FY12). Note that XL also reiterated its progressive dividend policy (FY12: 40.0% payout).

- Investment  case.  Maintain  NEUTRAL  on  Axiata,  with  an  unchanged SOP  FV  of  MYR6.55. While Axiata’s future  earnings  growth  will  remain challenging due to XL’s current underperformance and potential earnings dilution  to  XL  from  acquiring  Axis,  we  think  proper  execution  should boost  earnings  in  the  longer  term  while  capex  savings  would  allow  XL (and,  in  turn,  Axiata)  to  pay  more  dividends.  The  monetisation  of  its tower assets is a longer term catalyst for Axiata.

Source: RHB