AmInvestment Research retains Buy on Axiata, FV RM6.30

Axiata Group will use proceeds from the Sukuk issuance for general corporate purposes

KUALA LUMPUR: AmInvestment Research is maintaining its Buy call on Axiata Group with unchanged forecasts and sum-of-parts-based fair value of RM6.30 a share.

It said on Wednesday this was based on expectations of a value-enhancing re-merger with Telekom Malaysia which could reduce the valuation differential with its peers.  

The research house is neutral on the decision by Axiata, Singapore Press Holdings and Keppel Telecommunications & Transportation to not proceed with the strategic review of their stakes in SGX-listed M1.

Axiata, which has a 28.5% stake in M1 and accounts for 3% of group sum-of-parts, said that the proposals from interested parties have not met the minimum criteria and parameters determined by the majority shareholders. 

“Hence, no agreement has been reached to their earlier plan to dispose of their stakes in M1. 

In March this year, Morgan Stanley Asia (Singapore) was appointed as financial adviser to assist with the strategic review of their M1 stakes.  

“The unsuccessful sale is likely due to low market valuations attached to M1, which registered a 21% on-year drop in 2QFY17 net profit as a result of lower average revenue per user amid higher depreciation and subscriber acquisition costs.  

“While consensus expects M1’s net profit to decline by 7% in FY17F and 10% in FY18F, the telco operator is still expected to remain profitable,” it said.

AmInvestment Research’s current valuation of M1 is generally in line with its market price. 

M1’s FY17F enterprise value/earnings before interest, depreciation and amortisation (EV/Ebitda) of 7.7 times is higher than Axiata’s six times but below Singapore Telecommunication’s 14 times and Star Hub’s 8.6 times.  

M1’s balance sheet is also healthier at a net debt/FY17F EBITDA of 1.4 times versus Axiata’s 1.7 times.

“Hence, we are not surprised by the reluctance in M1’s major shareholders in selling their stakes below their targeted valuations. 

“Nevertheless, we view the group’s struggles in regaining forward momentum in subscribers and ARPUs in Malaysia and regionally as underpinning the need for the group’s re-merger catalyst with TM. 

“Axiata currently trades at a bargain FY17F EV/EBITDA of six times, way below its two-year average of 8.1  times versus SingTel’s 14 times,” said AmInvestment Research.