Merger to affect Axiata’s earnings quality

PETALING JAYA: Axiata Group Bhd’s earnings quality is set to decline following the completion of the proposed merger between the Malaysian operations of Axiata under Celcom and Telenor’s controlled Bhd.

S&P Global Ratings noted Axiata’s recent spate of acquisitions will push its debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) to 2.7 times and 2.8 times in 2023 from 2.2 times in 2021.

“The decline in Axiata’s earnings quality mainly stems from the loss of direct control over cash flow from wholly owned unit Celcom, which until now has contributed about a quarter of Axiata’s Ebitda.

Post-transaction, Axiata’s adjusted Ebitda, which will include dividends from the merged entity Celcom-Digi Bhd, will likely become more volatile,” it said.

That was because dividends are discretionary and will fluctuate with Celcom and Digi Bhd’s other cash flow needs, such as for capital expenditures, S&P noted.

“Nonetheless, Axiata’s management expects the merged entity to maximise its dividend payout available from free cash flow,” the ratings agency said.

Together, these factors will result in a weakened credit profile for Axiata, S&P Global Ratings, wrote as it lowered its long-term issuer credit rating on Axiata to BBB from BBB+.

“We also lowered the long-term issue ratings on the company’s senior unsecured notes and sukuk to BBB. We removed the ratings from CreditWatch, where we had placed them with negative implications on April 22, 2022,” it said.

The ratings agency said the stable outlook reflects its expectation that Axiata will maintain a broadly stable operating performance and manage its leverage so that its debt-to-Ebitda ratio will remain between two to three times over the next 24 months.

It also noted a greater proportion of Axiata’s consolidated cash flow will come from higher-risk emerging markets.

“While such markets, including Sri Lanka, Bangladesh and Nepal, have better growth potential – they face more regulatory and volatility risk than Malaysia.

“This could also expose Axiata’s earnings to greater risks,” S&P Global Ratings said.

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