Axiata Group Bhd
(Jan 13, RM6.98)
Maintain buy with target price (TP) of RM7.59: News wires have reported that Axiata  is interested in taking part in the privatisation of Vietnamese state-owned telco MobiFone. Axiata’s head of corporate development Annis Sheikh Mohamed has recently met with Vietnam’s Deputy Minister of Information and Communications Le Nam Thang in Hanoi to discuss this matter.

By acquiring a stake, a long-term cooperative relationship can be established through which Axiata can offer valuable technology transfer. Furthermore, Axiata believes that it is in a good position to help and guide this corporate exercise based on its experience.

The Information and Communications Ministry expects to complete the final proposal of this deal and obtain government approval by this year.

Other international telcos, including Norway’s Telenor Group and Sweden’s Comviq International, are also eyeing this opportunity to penetrate Vietnam.

Vietnam’s foreign investment law allows foreign investment in a company up to a 49% stake.

MobiFone’s current parent, state-owned Vietnam Posts and Telecommunications Group, will be entitled to hold up to 20% of the private entity.

If the deal materialises at the right price, this is a great opportunity for Axiata to further strengthen its regional leadership.

According to the Business Monitor 2013 report, mobile adoption in Vietnam is expected to be saturated at 141% in 2014 mainly dominated by prepaid voice and short message service (SMS). Data usage is still in its infancy with penetration rates for 3G, Internet and broadband users for 2014 forecast at only 31.8%, 36.1% and 5.4%, respectively.

Data average revenue per user (Arpu) is expected to grow at a five-year compound annual growth rate  of 21.2%.

As at the third quarter of 2012, MobiFone was the third-largest celco in Vietnam with 16.7% subscriber market share, behind sister company Viettel (41.8%) and VinaPhone (29.9%).

In terms of 3G subscribers, MobiFone was the leader with 42.2% market share, followed by VinaPhone (35.9%) and Viettel (21.2%).

Catalysts are higher with smartphone penetration boosting data Arpu, strong growth in developing markets with low penetration and more cost savings from collaboration with DiGi Telecommunications. Risks are regulatory risks, foreign exchange fluctuations and competitive risks.

Positives are: (i) mobile Internet growth; (ii) margin improvements through collaborations or sharing; (iii) recouping prepaid tax via the goods and services tax and (iv) unlocking value through tower listing.

Negatives are: (i) challenging operating environment in Indonesia with PT Axis Telekom Indonesia weighing down PT XL Axiata Tbk in the short term; (ii) OTT substituting voice and SMS; (iii) unable to monetise data.

Reiterate “buy” with unchanged sum-of-parts-derived TP of RM7.59. — Hong Leong Investment Bank Bhd, Jan 13

This article first appeared in The Edge Financial Daily, on January 14, 2015.