• Keep BUY and SOP-derived MYR3.40 TP, 23% upside and c.4% yield. We make no change to our forecasts post results call with management. Key highlights: i) The review of edotCo’s funding plans, which may push out the completion timeline, and ii) the year-end target for the completion of the Indonesian mobile merger. We continue to like Axiata Group for its earnings rebound and balance sheet deleveraging thesis. The tapering of US interest rates and the USD in 2H24 should alleviate the pressure off its books, as c.57% of its overall debt is in USD.

• edotCo recapitalisation may take longer. Axiata is re-assessing the funding options for edotCo, taking into account prevailing market conditions which could undermine valuations. This will not affect edotCo’s expansion plans which continue to be self-sustaining across markets. We note the completion of the edotCo Myanmar (EMM) stake sale (targeted in 2H24) should precede the re-capitalisation plan. While edotCo is still benefitting from Digital Nasional’s 5G network expansion (over 85% population coverage currently), we note that the pace of expansion has slowed. Excluding unrealised FX losses, edotCo’s normalised PAT stood at c.MYR1m vs reported LAT of MYR47m.

• Indonesia consolidation will address spectrum deficit and market structure. Management is hopeful of completing the merger by the year-end. With the earlier precedence from the consolidation of Indosat Ooredoo Hutchison (ISAT IJ, NEUTRAL, TP: IDR10,575) and Hutchison, the regulatory process and approvals should be smoother. The merger would allow XL Axiata (EXCL IJ, BUY, TP: IDR3170) to address its spectrum deficit, which currently comprises 90MHz of the 900/1800/2100MHz bands. With 62MHz of spectrum from Smartfren Telecom (FREN IJ, NR) and assuming EXCL gets to keep the entire block, the spectrum gap with its bigger rivals which hold 66% of assigned spectrum rights would narrow considerably. The consolidation would improve market dynamics, allowing for healthier price conduct with scale synergies. That said, we expect smaller synergies to be realised given FREN’s smaller network and distribution channels.

• Forecasts and valuation. We make no change to our forecasts post the results call. Our SOP-derived TP of MYR3.40 has a 2% ESG premium incorporated.

• Key risks are competition, weaker-than-expected earnings, regulatory setbacks, and FX volatility. Axiata has determined its Scope 3 emissions with near-term targets pending validation.

Source: RHB Research - 31 May 2024