Axiata has entered into an exclusive discussion for the possible merger of Robi and Airtel Bangladesh in Bangladesh. Maintain NEUTRAL with an unchanged MYR6.40 TP (8% upside). No details have been given so far, although we are not too surprised by this development, as the company has previously done some in-country consolidations as part of its value unlocking initiatives.

Possible merger with Airtel Bangladesh? Axiata announced that it has entered into an exclusive discussion with India’s Bharti Airtel (BHARTI IN, NR) to explore the possibility of combining the business operations of their respective telco subsidiaries in Bangladesh – Robi Axiata Ltd (98%-owned by Axiata) and Airtel Bangladesh Ltd. That said, the discussions are still in the preliminary stages with both parties stating that there is no certainty that the discussions would lead to the execution of binding definitive agreements between the two.

Merger likely to create a strong number two. We are neutral on the deal for now as details on the agreement are still sketchy. We note that in-country consolidation is not new to Axiata, as it seeks to strengthen its position in the markets, and for new value creation. An example of this was the strategic combination of Hello Axiata Company Ltd and Latelz Company Ltd in Cambodia back in 2012 (which catapulted Axiata into the market leader position) as well as the recent XL Axiata-Axis integration. Airtel Bangladesh was previously known as Warid Telecom (the sixth player in the Bangladeshi telco market) before Bharti Airtel took up a 70% stake in the company in 2010 for USD300m. It subsequently took full control of the telco in 2013. We understand that Airtel Bangladesh currently has >8m subscribers and, with Robi’s current 27.4m subscribers, we believe that the merger between the two companies is likely to position them as a strong number two player after Telenor (TEL NO, NR)-owned Grameenphone. That said, should the deal go through, we believe the impact to earnings should be minimal after conversion to MYR, as Robi presently contributes ~6.6% to Axiata’s bottomline.

Maintain NEUTRAL. No changes to forecasts pending more details on the deal. Our SOP-based TP is maintained at MYR6.40. We reiterate that the YTD de-rating of share price has mostly reflected its mid-term earnings risks. This report marks the transfer of coverage to Alia Arwina.

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Source: RHB Research - 10 Sep 2015