Analysts positive on merger

THE proposed mega merger of Axiata Group Bhd and Telenor ASA’s Asian assets may be viewed positively by analysts but it is expertise that Telenor ASA brings to the table and the expected cost synergies that makes this deal attractive.

Though details are still sketchy at this juncture pending signing of the deal in three months , suffice to say about RM15bil to RM20bil of cost synergies can be expected over a five year period.

This is mainly from Digi-Celcom’s network/IT system integration, procurement, procurement as a result of lower pricing from greater scale, tower operating efficiencies, consolidation of headquarters by Telenor and lower wholesale cost with the harmonisation of roaming rates.

The other benefits include a stronger MergedCo balance sheet with additional debt headroom and stronger ratings, ability to tap into Telenor’s strong execution and technology expertise and faster monetisation of passive assets such as IPO of the towerco, says CIMB Investment Bank in a note.

Axiata group president and CEO Tan Sri Jamaludin Ibrahim says “because of the savings, our profits will improve and therefore we will have a good free cash flow.’’

‘’AmInvestment Bank Research adds that the MergedCo’s combined US$6bil capex could be optimised while procurement synergies could lead to lower overall costs.

Public Investment Bank adds that the merger would be positive for Digi.Com Bhd (Telenor owns a 49% stake) as it would become the largest mobile operator in Malaysia. This could potentially improve margins due to cost savings from sharing of resources, network optimisation and capex avoidance.

“We believe market sentiment on Digi would be positive and as such, we upgrade Digi to trading buy. Axiata will be a proxy to the largest telecoms operator in Asia and become the “must have” stock due to its sizeable market capitalisation.

“We believe the potential synergies would compensate the additional risk of operating overseas assets,’’ Public Investment says.At least a dozen broking houses have a “buy’’ call on Axiata a day after the deal was announced. They see Axiata needing the deal more in view of thinning margins and tough market conditions.

Of the 27 research houses tracking Axiata Group, more than half have a “buy” call and the rest a “hold.’’ Some revised their 12-month target price (TP) to above RM5 a share. The highest TP is RM5.45. It is no surprise why some houses are saying Axiata is ripe for a re-rating.

More than a dozen broking houses have a “hold” call on Digi, half a dozen a “buy” and four a “sell” with a TP of RM4.64 according to data compiled by Bloomberg.

In five days since announcing the deal, Axiata has added RM3.17bil to its market capitalisation, while Digi has added RM1.32bil.

AllianceDBS Research adds “Digi is the more direct and immediate play on this potential merger, given that the bulk of the synergy is expected to be derived from combining their Malaysian operations. Axiata will be a proxy to the MergedCo via its 43.5% stake, before MergedCo is eventually listed.’’

It adds that while the deal is earnings accretive for Digi, they gathered from industry players that the company has been under-investing. Digi’s annual capex is RM700mil-RM800mil while Celcom Axiata Bhd (Axiata’s wholly owned unit) annual capex is RM1bil-RM1.1bil, given spectrum limitations, among others.

“As such, the merger of Digi and Celcom will drive capex savings of about RM700mil. Together with potential opex (network and direct cost), staff and marketing synergies, total annual savings could be as high as RM2bil-RM3bil, we estimate,’’ AllianceDBS says.

On the challenges, Kenanga Research cited spectrum as a major concern, especially in Malaysia, as the local authority may be reluctant to award similar spectrum to the same entity. Shareholder approvals, meanwhile, may be another hurdle, especially when the valuation is not appealing enough but still requires consents from the shareholders.

“Lastly, organisational and culture changes could be another challenge in view of both entities having different cultures, which may lead to a culture clash,’’ Kenanga says.

MIDF Research talks about the possibility of higher exposure to forex translation risk and the need for Axiata to sort out the Ncell in Nepal as it could potentially affect Axiata’s standing in the new merged entity.

CIMB adds that the key upside/downside risk is the deal materialising/collapsing, which will bring its target price to RM5.20/RM4.40.

CIMB expects Axiata to report about RM300mil core net profit for first quarter 2019 as contributions from all its opcos except Ncell improves. For full year, CIMB forecast revenues of RM24.9bil, net profit of RM1.2bil and earnings per share of 14 sen.