• Maintain BUY and MYR3.40 DCF TP (33% upside). Dialog’s guidance of neutral to positive earnings accretion for FY25F from its merger with Airtel suggests good synergies to be extracted, with the overall impact on Axiata’s earnings to be manageable in the medium term, in our view. We continue to like Axiata, with the earnings rebound and balance sheet deleveraging thesis as key share price catalysts. Our TP incorporates a 2% ESG premium.

• A positive dialogue. Axiata’s 82.3%-owned Sri Lankan subsidiary Dialog held a conference call last Friday on the merger exercise with Airtel. Operational synergies, optimal spectrum usage, and market consolidation were listed as key transaction rationales. The deal is expected to close by 3Q24 with Dialog’s shareholders to vote at an EGM. Post merger, Axiata’s stake in Dialog will be diluted to 72.57% with Airtel as the second-largest shareholder at 10.3%. The merger will result in an enlarged market share of 64% (3m additional customers) with good capex savings/avoidance from combined spectrum resources and removal of duplicate sites. Dialog sees a valuation uplift of 53% after taking into account integration costs and synergies.

• Dialog gains 30% more spectrum; good opex and capex savings from decommissioning of duplicate sites and asset reuse. As part of the merger, concessions were made for the release of spectrum and the allocations of contiguous spectrum blocks to operators. Dialog will gain 65MHz of spectrum with the largest allocations in the 850/900/1800/2100MHz bands. While it has to return 10MHz of the 850MHz and 900MHz spectrum, Dialog stands to gain 10MHz of the 850MHz and 5MHz of the 900MHz for a total of 15MHz. The larger spectrum portfolio would contribute to lower cost/GB with more efficient capex spending (less capacity and coverage capex). Airtel currently has >2,400 sites vs Dialog’s 5,500. It intends to decommission c.1,400 overlapping Airtel sites. With a dual brand strategy adopted, existing customers will keep their current plans. Management expects integration capex of SLR35m in FY24-25F on top of business-as-usual capex of SLR20- 25bn for FY24F.

• EBITDA and PAT neutral within 6-12 months of consolidation. There will be a c.8% uplift in Dialog’s revenue (based on FY23 numbers) from the merger, with management guiding for Airtel’s EBITDA and PATAMI to break-even within 6-12 months (currently loss-making) of consolidation, mainly from scale synergies. For FY24F, Dialog expects the earnings dilution to not be material (<5%) and to be neutral/earnings accretive from FY25F.

• Key risks: Competition across its mobile footprint, weaker-than-expected earnings, and regulatory setbacks.

Source: RHB Research - 22 Apr 2024