BIMB Research and Kenanga Research remain neutral on the merger due to the anticipated earnings dilution.
PETALING JAYA: PT XL Axiata Tbk’s merger with Smartfren Telecom in Indonesia allows the former to recognise a pro forma gain of RM445mil from the transaction, but the merger itself is not expected to be earnings accretive in near term as Smartfren is currently loss-making, analysts say.
BIMB Research and Kenanga Research remain neutral on the merger due to the anticipated earnings dilution.
However, BIMB Research said it sees potential for the merged entity PT XLSmart Telecom Sejahtera Tbk (XLSmart) to create a more comprehensive service provider, offering a broader range of services to meet diverse market needs.
RHB Research said the merger marks another significant milestone in Axiata Group Bhd
’s portfolio-optimisation strategy with proceeds from the partial monetisation of XL to be used to pare debt.
The research house likes the stock for its improving risk-reward proposition with balance-sheet deleveraging and operational improvements serving as catalysts.
Proceeds from the sale of additional XL Axiata shares of RM2.1bil will be used to pare debt.
With the merger, net debt to earnings before interest tax depreciation and amortisation for the nine months of 2024 (9M24) would decline to 2.48 times from 2.59 times while gearing improves from 1.21 times to 0.77 times.
Axiata Group’s market valuation post-merger will also see a net US$200mil increase as its lower stake post-merger is more than offset by US$475mil in proceeds from the sell-down in XL Axiata to Smartfren’s parent, the Sinar Mas conglomerate.
The research house said 9M24 profit before tax and minority interest should improve to RM1.22bil from RM1.17bil despite the de-consolidation of XL’s earnings post-merger (as a 34.8% associate), thanks to lower interest charges from lowered debt.
RHB Research maintained its “buy” call on Axiata Group with a target price of RM3.40 a share, while BIMB Research maintained its “hold” call with a target price of RM2.50 a share on the telco group.
CGS International Research (CGSI Research) noted Axiata’s management is hoping to extract US$300mil to US$400mil a year in pre-tax synergies from the merger.
The expanded spectrum holdings post-merger should also provide greater spectrum efficiency for the merged entity and the focus is on profitable growth rather than market share gains.
The spectrum for 5G is likely to be tendered soon in Indonesia, with the spread of spectrum across the three main players post-merger being similar.
Kenanga Research retained its “outperform” call on Axiata with a target price of RM2.60 a share, while CGSI Research has a target price of RM3.67.
