Profitability factor in Axiata merger proposal

MIDF Research said while XL Axiata has been profit-making, Smartfren has been in the red.

PETALING JAYA: Axiata Group Bhd may face profitability concerns from the potential merger of its Indonesian telecommunications arm PT XL Axiata Tbk (XL Axiata) with PT Smartfren Telecom (Smartfren) in Indonesia.

In a report, MIDF Research said while XL Axiata has been profit-making, Smartfren has been in the red.

“Referring to Smartfren’s 2023 annual report, the group suffered a net loss of 108.9 billion rupiah (RM32.2mil).

“This would potentially affect XL Axiata’s profitability, especially in the near term,” MIDF Research said.

Another factor would be the completed acquisition of PT Link Net Tbk for a combined 66.03% last June that is likely to create more pressure for the company.

“Thus, we view that the anticipated merger with Smartfren would create more pressure for the management to improve the profitability of XL Axiata.

“We are keeping our earnings estimates unchanged at this juncture pending the announcement on the transaction,” it said.

XL Axiata is the third largest telecommunication company (telco) in the country with 58 million subscribers.

Should the merger take place, Smartfren’s subscribers of 36 million will be added on but they will not be enough to rival both the top telcos in the country, PT Telekomunikasi Selular (Telkomsel) and PT Indosat Tbk (Indosat Ooredoo Hutchison).

“While the transaction may strengthen XL Axiata’s subscriber market share, our immediate concern will be Smartfren’s loss-making position.

“Also, should the funding involve cash, it would further burden the group’s balance sheet,” the research house noted.

In line with this, MIDF said it has downgraded its recommendation to “sell” with an unchanged target price of RM2.42.

Additionally, MIDF said the merger between Axiata Group and one of the largest conglomerates in Indonesia, PT Sinar Mas, has been in discussion since 2021.

It noted both parties have reportedly sought permission from the Indonesia government to merge their telco units, creating a US$3.5bil entity.

Meanwhile, MIDF said Axiata group’s merger efforts with Sri Lanka are still ongoing while its net profit for FY25 is expected to be diluted by 7% after the merger of its unit Dialog Axiata PLC with Bharti Airtel (Airtel Lanka), in Sri Lanka.

“The two transactions may create earnings volatility for the group in the near term. Thus, we do not favour the potential earnings uncertainty for Axiata group, which may lead to a lower dividend payout,” it said.

MIDF did not discount the possibility that the funding of the transaction will be done via share swap for the Sri Lanka merger exercise.

“Our view is primarily premised on the group’s huge borrowings of RM24.8bil as at fourth quarter of 2023. Should this happen, this transaction may also dilute Axiata group’s current stake (66%) in XL Axiata.”