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Axiata Group Bhd 
(Sept 10, RM5.93)
Maintain market perform with an unchanged target price (TP) of RM6.05:
Axiata Group and Bharti Airtel Ltd (Bharti) have entered into an exclusive discussion to explore the possibility of combining the business operations of their telecommunication subsidiaries in Bangladesh, namely Robi Axiata Ltd and Airtel Bangladesh Ltd. Nevertheless, there is no certainty that this discussion will lead to the execution of binding definitive agreements between both parties, according to the management. 

We are “neutral” on the news due to limited financial information available on Airtel Bangladesh Ltd at this juncture. Axiata recorded a cash balance of RM5.4 billion and RM14 billion in debts as of end of the first half of 2015 (1H15), translating into a gross debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio of 2.03 times. As the group has reached its optimal capital structure of 2.0 to 2.2 gross debt/Ebitda range, there is limited room for Axiata to gear up should the merger take place. 

Robi recorded a turnover of RM1.17 billion with profit after tax and minority interests of RM80 million in 1H15, accounted for about 12.4% and  6.7% to the Axiata Group. Robi’s subscriber base has improved by 14% year-on-year to 27.4 million in second quarter of 2015 and extended further to 27.9 million in July. Together with Airtel Bangladesh, which recorded 9.1 million subscribers as of July 2015, the combined entity will overtake Banglalink Digital Communications Ltd (about 32.4 million subscribers) and become the second largest carrier in terms of the subscribers’ market share. Grameenphone Ltd, meanwhile, will continue to be the market leader with 54 million users or 42% subscribers’ market share.  

On the other hand, we understand that Bharti has spent US$300 million (RM1.29 billion)  (translated into 6.88 times of terminal value (TV)/Ebitda or 1.28 times at the TV/revenue basis) to acquire a 70% stake from Dhabi Group in 2010 followed by another undisclosed amount to acquire the remaining 30% from the latter in the year 2013. 

Increasing competition, currency fluctuation and regulatory challenges will continue to be key challenges faced by Axiata’s operating companies. We leave our financial year ending Dec 31, 2015 (FY15) to FY16 earnings estimates unchanged. We maintained “market perform” and our TP at RM6.05, based on an unchanged target FY16 enterprise value/forward Ebitda of 8.6 times, representing a four-year average. — Kenanga Research, Sept 10

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This article first appeared in digitaledge Daily, on September 11, 2015.

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