Failed telco merger talks wipe out combined RM9.28b market cap

This article first appeared in The Edge Financial Daily, on September 11, 2019.
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KUALA LUMPUR: The shares in Axiata Group Bhd and DiGi.Com Bhd (DiGi) went rolling downhill yesterday on a wave of selling after Axiata and DiGi’s largest shareholder, Telenor ASA, called off their merger talks. Some analysts downgraded their recommendations on the two telecommunications companies (telcos).

Axiata fell like a rock, tumbling 15.8% yesterday — its biggest fall since it was listed in 2008. Some RM7.03 billion evaporated from the telco’s market capitalisation yesterday following a 77 sen drop to RM4.11, bringing down the group’s market capitalisation to RM37.7 billion. The counter saw 41.06 million shares changing hands.

The drop in DiGi’s share price was smaller, losing 5.93% or 29 sen to RM4.60 yesterday, with 18.22 million shares traded. Still, this was its largest drop in nearly nine years since October 2010. Some RM2.25 billion of market capitalisation was wiped out from the telco. DiGi’s market capitalisation stood at RM35.77 billion at yesterday’s closing.

As of yesterday, 14 analysts had issued “hold” calls on Axiata, according to Bloomberg. Four had placed “buy” calls and eight “sell” calls. Axiata’s 12-month consensus target price (TP) is RM4.73.

DiGi, meanwhile, had seen 19 “hold” calls and four “sell” calls, with a 12-month consensus TP of RM4.65.

Last Friday, the two groups announced that the proposed merger between Telenor’s Asian operations and Axiata had been called off “due to some complexities involved in the proposed transaction”.

Affin Hwang Capital’s Isaac Chow said investors were not surprised by the collapse of the merger talks as the media had already alluded to the possibility.

The research house maintained its “hold” call on DiGi, with a TP of RM4.55 from RM5 previously, after incorporating a lower long-term growth rate forecast of 1% (from 1.5%).

“At 26 times 2020E (estimated) price-earnings ratio (PER), DiGi is trading close to its five-year average PER of 25.2 times, which looks fair,” said Chow in a note yesterday.

As for Axiata, Affin Hwang Capital downgraded it to “sell” from “hold”, with a lower TP of RM4.25 from RM5.20.

Chow noted that in the absence of value-accretive mergers and acquisitions, he expects Axiata shares to trade at a discount, with Celcom’s enterprise value to earnings before interest, taxes, depreciation and amortisation declining to 10 times from 12 times previously.

“Without a business combination, we expect Celcom’s business performance to continue to lag [behind] Maxis and DiGi, and hence the lower valuation multiple,” the analyst said.

Despite improvements seen in Axiata’s Indonesian and Bangladeshi operations, disappointment at the merger will likely overshadow these improvements and derate its share price, said the analyst.

BIMB Securities Research downgraded Axiata to a “trading sell”, with an unchanged TP of RM4.25.

It said while it does see hidden value in Axiata’s regional footprint, the counter’s share price has run ahead of its fundamentals.

“We are less sanguine about the stock owing to the challenging outlook facing the sector and inherent regulatory risks in some of its key markets,” the research house said.

Turning to DiGi, it maintained its “hold” call and TP of RM5 as it feels that the group’s dynamic structure — based on the capitalisation of expertise from Telenor — would provide sustainable future earnings.

“DiGi’s outlook remains stable, underpinned by its advantage to capitalise on its parent Telenor’s expertise to better deploy resources compared to its peers. Some of the measures undertaken include outsourcing key functions to one of its main vendors. This allows DiGi to lower costs to boost its bottom line and lighten its books to enhance shareholder returns,” BIMB commented.

PublicInvest Research, meanwhile, downgraded Axiata to a “trading sell” from “neutral”. The research house maintained its TP of RM4 on Axiata.

“Although our TP on Axiata remains unchanged at RM4, its current share price suggests a downside potential of 18%,” the research house said.

PublicInvest Research maintained its “neutral” call and TP of RM4.72 on DiGi.

Meanwhile, Bloomberg reported yesterday that CK Hutchison Holdings Ltd had preliminarily approached Axiata for a potential combination of their Indonesian telco operations.

CK Hutchison had informally expressed its interest in exploring a combination of its Indonesian wireless business with Axiata’s local unit, PT XL Axiata Tbk, Bloomberg said, citing people with knowledge of the matter.

“The parties haven’t started any substantive negotiations, according to the people, who asked not to be identified because the information is private,” the report said.