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This article first appeared in The Edge Financial Daily on October 1, 2018

Axiata Group Bhd
(Sept 28, RM4.56)
Maintain neutral with an unchanged target price (TP) of RM5:
It has been announced that Singapore-listed Keppel Corp Ltd and Singapore Press Holdings Ltd (SPH) are extending a voluntary general offer (via Konnectivity Pte Ltd, a special purpose vehicle) for M1 at a cash offer of S$2.06 (RM6.24) per share. The offer is at a 6% premium to Axiata’s book value for M1, which could translate into a gain of about RM95 million if it accepts the offer. In our opinion, the offer price is fair, at about 18 times financial year 2019 (FY19) earnings forecast and a 25% premium over consensus valuation for M1. Also note that M1’s future prospects are not entirely rosy given a challenging operating environment with rising competition and hence, continuous pressure on margin. Therefore, we reckon that Axiata should accept the offer and divert its focus away from Singapore. It would be more beneficial to Axiata to reinvest the sales proceeds (approximately RM1.6 billion) in other developing markets in South Asia. Our “neutral” call and RM5.00 TP remain unchanged (M1 accounts for 3% of our sums-of-the-parts valuation for Axiata) but Axiata’s refusal to accept the offer could create some uncertainties over its long-term plan for M1. Should Axiata extend a competing offer for M1, we believe it would not go down well with the market and post downside risk to its share price.

Currently, Keppel and SPH jointly hold a 32.8% stake in M1 while Axiata is M1’s single largest shareholder with a 28.6% stake. M1 is the third-largest player in Singapore’s telecoms market. In recent years, competition has intensified considerably owing to the entry of a new player, which triggered a price war and led to falling revenues and margins for all telcos in Singapore. M1, which is predominantly a mobile service provider, requires extensive business transformation in order to stay relevant in a dynamic telecoms industry that is moving towards convergence. The new management and shareholders plan to enhance long-term value of M1 through business diversification, efficient cost management, digitalisation, and balance sheet optimisation.

As an associate company, M1 contributed to about 10% of Axiata’s normalised profit in second quarter of FY18. We note that as part of Axiata’s global footprint objective, it aims to become the leading or a strong No 2 telco in the local market but given that M1 is only the third-largest player in Singapore while competition is intensifying, we reckon that Axiata should divest its stake in M1. Although the premium may not be attractive to Axiata given that it holds the controlling stake as the single largest shareholder, we think the offer is fair considering an eroding valuation for the telecoms sector. Axiata’s media release suggests that the offer made by Keppel and SPH is inadequate and should reflect a control premium. — PublicInvest Research, Sept 28

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