CIMB Research retains Hold for Digi on merger with Celcom

Digi is back in the Securities Commission

KUALA LUMPUR: CIMB Equities Research is maintaining its Hold rating on Digi.com with a 7% higher target price of RM4.70, which is its discounted cashflow based fair value (RM4.42) plus synergies from a Digi-Celcom merger. 

It said on Tuesday the latter assumes a) the acquisition of Celcom is at fair value, b) the synergies are shared equally between Digi’s current shareholders and Axiata and c) after applying a 50% chance of the deal happening. Key upside/downside risks are the deal materialising/collapsing, which will bring our target price to RM4.95/RM4.40.  

To recap, Axiata/Telenor announced that they are in discussion on a potential non-cash merger of their Asia operations under a new entity (MergedCo), in which they will own a 43.5%/56.5% stake. 

MergedCo would include a combined Digi-Celcom (Malaysia), plus XL (Indonesia), DTAC (Thailand), Telenor Pakistan and Myanmar, Ncell (Nepal), Smart (Cambodia), Dialog (Sri Lanka) and tower assets. 

The plan is to sign a binding agreement by 3Q19, though there is no certainty that the signing will occur at this stage. 
   
Digi-Celcom would be the largest Malaysian mobile operator under the proposed merger.

 CIMB Research said Digi plans to acquire Celcom via a share swap. Thereafter, Axiata and Telenor would inject their stakes in Digi-Celcom into MergedCo. 

“Based on our understanding, the plan is to keep the listing status of Digi, which suggests that MergedCo will seek a mandatory general offer (MGO) waiver from the relevant regulatory authorities. 

“Post-merger, DigiCelcom would be the largest mobile operator in Malaysia with an estimated proforma revenue market share of 54% in 2018, overtaking Maxis (34%),” it said.  

The research house said Axiata and Telenor expect the MergedCo to realise RM15bil to RM20bil of cost synergies. 

Out of this, Axiata has guided that c.45% (RM7bil to RM9bil) will arise from the merger between Digi and Celcom. 

This will mainly be derived from opex savings from the removal of duplicate network sites, sharing of IT system platforms and rationalisation of sales and marketing expenses. Combining spectrum holdings will also lead to more efficient usage and greater capacity, resulting in capex avoidance. 

“In our view, key risks that may derail the deal are: a) getting regulatory approval for the Digi-Celcom merger and transfer of assets/licences in nine markets into MergedCo (with MGO waiver) and b) potential disagreements over control/framework in running MergedCo (including key personnel appointments) and longer-term strategy/plans,” it said.