This article first appeared in The Edge Financial Daily on February 15, 2018

Axiata Group Bhd
(Feb 14, RM5.60)
Reiterate neutral, maintain core earnings forecasts and a target price (TP) of RM5.60: Axiata Group Bhd announced that its shareholding in associate company Idea Cellular has been diluted from 19.7% to 18.1% following its non-participation in Idea’s preferential share issuance. As a result, Axiata will be recognising a loss on dilution amounting to RM151.5 million in financial year 2018 (FY18). This would lead to a 10% decline in our FY18 earnings estimate, though our core net profit forecast remains unchanged. Post-merger with Vodafone, Axiata’s stake in the merged entity would fall below 10% and we believe it would eventually dispose of its stake in Idea. We reiterate our “neutral” call on Axiata. 

Idea, India’s third-largest wireless operator with about 200 million subscribers, has plans to undertake a 67.5 billion rupee (RM4.13 billion) capital raising exercise that could involve a preferential issuance of Idea shares, institutional placement or rights issue. As part of this exercise, Idea had raised 32.5 billion rupees through a preferential share issuance of 326.6 million shares at 99.50 rupees per share on Monday. Axiata did not participate in this issuance and as a result, its shareholding in Idea has been diluted by 1.6% to 18.1%. 

Following this dilution, Axiata will recognise a loss on dilution amounting to RM151.5 million in FY18. This would result in a 10% drop in our FY18 profit forecast. Nevertheless, our core net profit forecast remains unchanged. Idea continues to be a loss, following the entry of a new player that disrupted the industry’s landscape. Idea is in the process of completing its proposed merger with Vodafone (expected to be completed by the first half of 2018). Post-merger, Axiata’s holding in the merged entity would fall below 10%. 

Given the insignificant stakeholding and tough business environment in India, we believe Axiata would eventually divest its entire stake in Idea.

Moreover, its non-participation in Idea’s cash call exercise may suggest the absence of long-term commitment to Idea’s future growth. — PublicInvest Research, Feb 14