• Stay BUY, new SOP TP of MYR4.13 from MYR4.22, 35% upside. We see weaker earnings in FY23F from the deconsolidation of Celcom and integration costs. This is notwithstanding the full-year contribution from LinkNet, stronger edotco contributions, and interest savings. The market has yet to factor in the earnings deconsolidation, pending further clarity from MergeCo on cost and synergies. We update our TP to reflect the 33.1% stake in Digi.Com (DIGI MK, NEUTRAL, TP: MYR3.73) and MYR2.8bn merger proceeds, with a 2% ESG premium bolted on.

• Pivoting Axiata 5.0. Axiata’s 2022 Analyst & Investor Day (AAID) on 2 Dec featured presentations from key operating units and updates on its 2023- 2025 transformation agenda. Key highlights were: i) The lower FY24F DPS (vs >20 sen previously guided), ii) ongoing de-layering of assets with the focus on growth opportunities and value unlocking of infrastructure and tech-company (TechCo) assets, and iii) balance sheet management with gross debt/EBITDA set to decline to 2.5x by FY25 (3Q22: 3.2x) from asset monetisation/divestments. The value illumination of TechCo assets, which command premium multiples, will lift overall valuation in the longer term.

• Core PAT to fall by a third in FY23F. Axiata expects EBIT and underlying PAT to fall by 30% and 29% in FY23F (FY22F: +7%) to MYR3.1bn and MYR1bn (30-34% below market estimates), mainly from the deconsolidation of Celcom’s earnings (from Dec 2022) and integration costs before a recovery in FY24F. Core earnings are projected to accelerate in the longer term (FY25F onwards), led by non-mobile growth (infrastructure and the shift to a TechCo), merger synergies, and the Philippine tower assets turning EBITDA positive. Based on pro-forma numbers, we estimate the de-consolidation of Celcom’s earnings will shave our FY23-24F core earnings by 26-29%.

• We see a large part of Celcom-Digi (CDB) merger synergies being back-loaded (after Year 2), with integration costs and related investments to address the spectrum divestment as part of the undertakings to the regulator likely to dilute medium-term earnings.

• edotco co-location to surpass site deployments in FY22 with aggressive 5G deployment by Digital Nasional (DNB), where close to 1k sites have been handed over. The ‘core’ (Malaysia & Bangladesh) and ‘growth markets’ (Philippines and Indonesia) are expected to make up c. 85%/87% of revenue/EBITDA in the long-run (currently 70%). A potential market being looked at is Thailand, where we gather a regulatory process is underway for the creation of independent towercos. Key risks: Lower-than- expected merger synergies, competition, economic headwinds at frontier markets and regulatory setbacks.

Source: RHB Research - 6 Dec 2022