This article first appeared in The Edge Financial Daily on March 22, 2018

Axiata Group Bhd
(March 21, RM5.49)
Maintain buy with a fair value of RM6.60: Our valuation is premised on a potential value-enhancing re-merger with Telekom Malaysia (TM) which could reduce the valuation differential with its peers and re-energise its earnings prospects. Axiata’s 83.3%-owned Dialog Axiata (Dialog) is expanding its digital footprint by entering into a shareholder agreement with St Anthony’s Property Developers (Private) Ltd to acquire a 35% equity stake for 262.5 million Sri Lankan rupees (RM6.6 million) in Digital Reality (Private) Ltd to operate and manage a data centre business in Sri Lanka.  

This minor investment will have a negligible impact on the group’s earnings, asset base and gearing. However, as Dialog, which accounts for 4% of Axiata’s sum-of-parts (SOP), is Sri Lanka’s second-largest fixed telecommunications provider, and serves residential and enterprise customers with voice, broadband, leased lines, data centre solutions and other customised telecommunication services, this strategic acquisition is to enlarge the group’s data management services.

As such, Dialog has further expanded its portfolio by investing in digital services in wholly-owned Digital Commerce Lanka (Private) Ltd, a 70% stake in Digital Health Digital Health (Private) Ltd, a 51% stake in Headstart (Private) Ltd, involved in digital education, and Mobile Money Service eZ Cash for digital financial services (through its internationally acclaimed and 99% ownership in Colombo Trust Finance plc).

In financial year 2017 (FY17), Dialog’s revenue, earnings before interest, taxes, depreciation and amortisation (Ebitda), and normalised net profit grew 9%, 16% and 19% respectively from strong home broadband expansion and aggressive market penetration.

Apart from Sri Lanka, Axiata is expected to incur a potential loss of RM241 million, 17% of the group’s FY18 forecast (FY18F) earnings, from the placement of 424 million Idea Cellular (Idea) shares at an issue price of 82.5 Indian rupees (RM4.96) per share worth 35 billion Indian rupees to eligible qualified institutional buyers. This placement will dilute Axiata’s stake in India-based Idea from 18% to 16%. Idea currently accounts for 6% of Axiata’s SOP.  

We highlight that the group will be further providing a RM1.2 billion to RM1.8 billion non-cash impairment upon completion of the impending Idea-Vodafone merger by the first half of FY18, which could translate into a FY18F loss.  

While this will cut the carrying value of its stake in Idea by 30% to RM4.5 billion, these impairments should not have any substantive impact on the group’s FY18F normalised earnings, which exclude provisions. Hence, we are mildly neutral on this upcoming development, which is unlikely to impact the group’s dividend-paying capability.  Axiata currently trades at a bargain FY18F enterprise value to Ebitda of seven times, way below its two-year average of 8.1 times versus Singapore Telecommunication’s 14 times. — AmInvestment Bank, March 21