Higher Idea-Vodafone merger impairment unlikely to impact Axiata’s dividends

M1's largest shareholders, which also include Malaysia's Axiata(pic) Group, had considered but eventually called off a strategic review of their holdings in the telecommunication provider last year, saying parties interested in buying those stakes did not meet certain criteria.

KUALA LUMPUR: While likely to result in an FY18 loss of RM1.8bil for Axiata Group Bhd, the higher non– cash impairments arising from the fall in its associate Idea Cellular’s share price should not have any substantive impact to its FY18F normalised earnings, which exclude provisions, nor the group’s dividend-paying capability, said AmInvestment Bank Research.

The research house said on Thursday that it is maintaining Axiata’s forecasts for now, pending the results announcements of PT XL Axiata next week and the group’s next month.

It has been reported that the approval for the merger of Axiata’s 16.3%-owned Idea Cellular with Vodafone could materialise within this month as both companies have recently settled their obligations under protest to India’s Department of Telecom (DoT).

“However, the merger will cause Axiata’s equity stake in the merged Idea-Vodafone entity to halve to a non-strategic investment level of 8.2%. 

“Hence, management had earlier indicated that Axiata may look to dispose of its investment in India,” it noted

As Idea’s operating results will not be equity accounted post-merger, the research house said this should be positive for the group in the medium term given the likely continued losses that the combined entity is likely to incur against the background of India’s highly competitive environment driven by Reliance Jio. 

Based on consensus expectations, Idea is projected to incur a loss of INR65mil in FY19 and INR56mil in the following year.

As Idea’s share price has significantly fallen to INR55 per share from over INR100 per share since the beginning of the year, the group may need to provide for a higher non-cash impairment of up to RM3bil compared to an earlier range of between RM1.2bil to RM1.8bil. 

This could halve the carrying value of its stake in Idea from RM5.4bil currently to RM2.4bil.