CIMB Research retains Hold for Axiata after sale of edotco stake

Aiming high: Axiata corporate headquarters in Kuala Lumpur. The group

KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Axiata Group after the sale of a stake in edotco to Innovation Network Corporation of Japan (INCJ) and Khazanah Nasional for US$600mil.

The research house said on Thursday it was awaiting more information from Axiata on edotco’s net profit. Without this, it was unable to factor in potential earnings reduction due to minority interest post-deal. 

“We keep our sum-of-parts based target price of RM4.50 (after 10% discount) and Hold rating. The 4Q16 results will be released on Feb 23.

“Upside risk is stronger-than-expected recovery at Celcom/XL; downside risks are more intense competition and 700MHz spectrum refarming in Malaysia,” it said.

Axiata had on Wednesday announced it was issuing new edotco shares to INCJ for US$400mil (RM1.78bil) and sell existing edotco shares to Khazanah for US$200mil (RM899mil) cash. The transaction should close by end-January.

“This will give INCJ/Khazanah a 22.7%/11.4% stake, while Axiata will hold the remaining 65.9% in edotco, based on its current portfolio comprising 100% in edotco Malaysia (3,717 towers), 87.5% in edotco Myanmar (1,250 towers) and 80% in edotco Bangladesh (7,993 towers),” it said.

CIMB Research said that at a later date, Axiata will inject 80% of edotco Sri Lanka (2,144 towers) and 62% of
edotco Cambodia (1,950 towers) into edotco. Following this, it estimates Axiata’s stake will rise to 68.4%, while INCJ/Khazanah will be diluted to 21.1%/10.5%.

This is a positive development as the i) US$400mil proceeds from INCJ will be used to fund edotco's future acquisitions/organic growth and pare down debt from prior acquisitions and ii) US$200mil from Khazanah will be used to repay Axiata's debt.

“On a proforma basis, the sale proceeds from Khazanah will reduce Axiata's total debt to an estimated RM19.6bil by end-2016 (and less if we include edotco's debt repayment). This translates into proforma gross debt/EBITDA of 2.4 times, which is in line with Axiata's target to bring it below 2.5 times,” it said.

CIMB Research noted that despite this being a pre-IPO placement, Axiata is fetching a good valuation for edotco. The deal is being transacted at FY16 EV/EBITDA of 12.5 times, which is in line with Tower Bersama’s current valuation in Indonesia.

Based on the final portfolio, the transaction implies that Axiata’s current 100% equity stake in edotco is worth US$1.5bil (RM6.67bil), of which essentially US$200mil (RM899mil) is being crystallised through a 10.5% stake sale to Khazanah.

“edotco’s annualised EBITDA for FY16 is RM685m (proforma). Based on Axiata’s FY16 EV/EBITDA of 6.3x, the share price may be currently imputing an equity value of RM2.42bil (excluding net debt and minority interest of RM1.90bil) for edotco.

“As such, if the RM6.67bil (US$1.5bil) equity value of edotco is fully recognised by the market, it could add an extra RM4.25bil (48 sen a share) to Axiata’s sum-of-parts based fair value,”  it said.