What’s next for Axiata?

Axiata corporate headquarters

Market awaits next move after telco and two other major shareholders decide not to sell stakes in M1

IT was estimated that Axiata Group Bhd would have made RM1.8bil from the expected sale of its stake in Singapore telco player M1, enhancing its earnings in financial year 2018.

Analysts had estimated that the M1 stake sale, together the expected sale of Axiata stake in India’s Idea Cellular, could have raised a total of RM7bil for the company.

However, Axiata, along with two other major shareholders of M1 Ltd, said on Tuesday that they had decided not to sell their stakes in M1.

In its filing with the stock exchange, Axiata, which owns Celcom Axiata Bhd, said the decision was made after taking into consideration the proposals from the interested parties which, despite “a favourable level of interest”, did not meet the minimum criteria and parameters as determined by the majority shareholders.

The other two major shareholders, which had embarked on the strategic review of their shareholdings in M1 back in March 2017, are Keppel Telecommunications and Transportation Ltd and Singapore Press Holdings Ltd.

The three shareholders collectively own over 60% in M1 – Axiata owns 28.39%, Keppel T&T 19.23% and Singapore Press Holdings 13.38%.

Observers say that the decision reflects the difficulty of trying to sell the smallest player in Singapore’s saturated market.

Making matters worse is the impending entry of a fourth telco player in the Singapore market.

It was reported that a unit of Australia’s TPG Telecom Ltd had won a bid in December to become Singapore’s fourth telco, with operations set to commence in mid-2018.

However, in a report following Axiata’s announcement on Tuesday, AmInvestment Bank Research said it is neutral on the decision, and maintained its “buy” call on the counter.

The research house says the unsuccessful sale is likely due to low market valuations attached to M1, which registered a 21% year-on-year drop in second quarter 2017 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 financial year 2017 (FY17) and 10% in FY18, it says the telco is still expected to remain profitable.

The research house says M1’s FY17 enterprise value/earnings before interest, tax, depreciation and amortisation of 7.7 times is higher than Axiata’s 6 times but below competitors Singapore Telecommunication’s 14 times and Star Hub’s 8.6 times.

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

AmInvestment Bank Research, however, says its “buy” call on Axiata is premised on expectations of a value-enhancing re-merger with TELEKOM MALAYSIA BHD (TM).

Such a move, it says, could reduce the valuation differential with its peers.

The research house views Axiata’s struggles in regaining forward momentum in subscribers and average revenue per user (Arpu) in Malaysia, and regionally, as underpinning the need for the group’s re-merger catalyst with TM.

Some analysts expect the potential re-merger of Axiata and TM to be a re-rating catalyst that could generate investor interest in both counters.

Axiata was created by demerging TM in 2008. TM’s cellular assets were taken out and parked under Axiata, which was subsequently listed.

Previously known as TM International Bhd, the company underwent a rebranding exercise and unveiled its new company name – Axiata Group Bhd – and logo in May 2009.

The rebranding exercise was seen as a move to further establish Axiata as an independent regional entity with its own distinct aspirations and strategies.

Apart from M1, Idea and Celcom, Axiata owns 66.4% in Indonesia’s XL Axiata, 83.32% in Sri Lanka’s Dialog, 91.59% in Robi Axiata in Bangladesh, 95.3% in Smart in Cambodia, 80% in Nepal’s Ncell, 28.8% in Singapore’s M1 Ltd and 89% in Pakistan’s Multinet.

Axiata has held a stake in M1 since 2005, with the company having consistently delivered good returns.

In September last year, Axiata indicated that it may be interested in raising its stake in M1 as part of plans to turn the company into a bigger regional carrier.

Chief executive officer Tan Sri Jamaludin Ibrahim said increasing the stake in M1 would build on Axiata’s presence in South and South-East Asia, where it already controls operators in Indonesia, Sri Lanka, Bangladesh and Cambodia.

However, the company later confirmed that it was not in talks to increase the stake.

Soon after this, there was market speculation that Axiata was considering possible sales of its overseas units. Bloomberg reported at the time that Axiata was looking to trim stakes in some of its overseas assets to raise US$700mil.

In March this year, Axiata announced that it, along with other substantial shareholders of M1, were exploring options including a sale in M1 as Singapore geared up for a new entrant into the wireless market, aimed at introducing more competition to drive down rates and increase service quality.

The three parties jointly appointed Morgan Stanley Asia (Singapore) as their financial adviser to assist with the strategic review.

Axiata said, however, that there was no assurance that any transaction would materialise from the strategic review or that any definitive or binding agreement would be reached.

In May, Bloomberg reported that Singapore Internet provider MyRepublic Ltd, backed by billionaire Xavier Niel, was seeking a private-equity partner as part of its bid for M1. However it was later reported that the company would no longer pursue M1.

Shanxi Meijin Energy Co and China Broadband Capital also reportedly submitted first-round offers for M1.

Following the announcement that the substantial shareholders would not be selling their stakes, shares in M1 Ltd slumped as much as 8% to S$1.935.

The shares dipped the most in almost nine years from Tuesday’s close of S$2.10, according to Bloomberg data.

On the same day, M1 also reported its second-quarter results, with net profit sliding 20.8% on the back of higher depreciation and interest expenses.

The telco reported a net profit of S$32.5mil for the three months ended June 30, down from S$41mil in the same period a year earlier.

The wireless carrier, which accounts for 3% of Axiata’s sum-of-parts, has some 2.06 million customers.

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