This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.

JUST over two years after it failed in its bid to secure one of the two mobile operating licences up for grabs in Myanmar, Axiata Group Bhd has found another route to the region’s last underpenetrated telecommunications market that could help lift its earnings in the coming years.

What’s more, Axiata’s entry into Myanmar — by taking a 75% controlling stake in Digicel Myanmar Tower Co Ltd (MTC) in a deal that values the latter at US$221 million (RM911.6 million) — also expands the company’s portfolio of tower assets, which investors have long seen as a potential for initial public offering.

An IPO would free up cash for expansion and dividend payments, but this is not a priority at the moment for Axiata, which is looking to become one of the largest, most efficient and profitable tower companies in the world. It is currently in the top 20.

In fact, Axiata told analysts last week that edotco Group Sdn Bhd — its wholly-owned subsidiary that is buying the 75% stake in MTC — is looking to buy at least one more tower company. Its tower unit is working at expanding its portfolio from over 14,700 towers in August to as many as 25,000 by year end.

When describing the MTC deal, Axiata president and group CEO Datuk Seri Jamaludin Ibrahim said in a statement that the deal “is very much in line with Axiata’s long-term strategy to create new revenue streams apart from the core mobile business. The acquisition will enhance Axiata’s telecoms tower infrastructure business significantly in a market outside the group’s existing footprint”.

The MTC deal may also gain the group a new strategic partner in Myanmar tycoon Serge Pun, whose Singapore-listed Yoma Strategic Holdings Ltd (fundamental: 1.90; valuation: 1.10) owns the remaining 25% stake in MTC. Forbes lists Pun at No 45 on its “Singapore’s 50 Richest” list — he has an estimated net worth of US$505 million this year.

His son and former Goldman Sachs banker Melvyn Pun, who is also Yoma’s CEO, said in an Oct 2 statement to the Singapore Exchange that the company “is still in discussions with edotco regarding its 25% shareholding”, will evaluate its options and make further announcements when there is a material development.

It remains to be seen if Yoma will stay on as a strategic partner or divest its 25% stake to Axiata. Yoma believes its stake is worth US$20 million more than the value carried in its books — based on the enterprise value of US$221 million agreed between Digicel Group Ltd and Axiata’s edotco for the 75% stake.

According to the presentation slides at Yoma’s annual general meeting on July 27, part of the US$50 million loan it had received from the Asian Development Bank (the first tranche of a US$100 million loan) has been earmarked for three projects, including the “construction and leasing of telecoms towers by Myanmar Tower Company”. It is not immediately known whether any of the funds have been used.

While analysts do not expect funding to be an issue for Axiata (fundamental: 0.85; valuation: 1.10), a strong local partner would be a boost for the company due to the perceived political risks. Yoma, which is largely in the real estate, consumer and automotive businesses in Myanmar, has experience in navigating the country’s complex land use laws and approval processes. This is imperative as securing sites and approvals to build towers is a lot tougher than securing funds, industry experts say.

A written consent from Yoma’s wholly-owned subsidiary, YSH Finance Ltd, is one of the conditions necessary for the transfer of Digicel Group’s 75% stake to edotco. The deal also needs regulatory approvals in Myanmar, where mobile penetration is less than 50% in a country with over 51 million people. In Malaysia and Indonesia, where Axiata’s two largest operating companies are based, the mobile penetration rate is 145% and 126% respectively.

It is worth noting that Axiata was among 13 shortlisted companies for a Myanmar

telecoms licence in 2013 — it lost to Norway’s Telenor ASA and Qatar’s Ooredoo. Telenor Myanmar Ltd, which on Sept 27 marked its first year of operation, said it had since July this year serve over 10 million customers with more than 3,100 towers across 13 major division/states. According to The Myanmar Times, Ooredoo has 2,500 towers covering 72% of the population and is looking to raise that to 90% by year end.

To be sure, the Myanmar deal — as with any foreign investment deals — has its risks. Citing unnamed market sources, The Myanmar Times on May 18 said MTC had been put on the block with all its contracts and sites. According to the same article, MTC had a 2013 agreement with Ooredoo to build and lease 1,250 telecoms towers but unlike other tower companies, such as Irrawaddy Green Towers, MTC did not provide power to Ooredoo. This could not be independently verified at press time.

Having gained over 10% since the Oct 2 announcement to close at RM6.38 last Friday, Axiata was among the top gainers last week — its gains more than double the bellwether FBM KLCI’s over the same period.

Analysts are largely neutral on Axiata, with 21 “holds” versus 10 “buys”. Price targets range from RM6 to RM7.80, averaging at RM6.52, which implies limited upside in the near term. For now, analysts are not expecting any special dividends from Axiata, given guidance of capital expenditure staying high next year.

In its Oct 2 statement, Axiata describes edotco as the first regional tower service provider in Asia, managing over 14,000 towers in the companies it operates in, “including Malaysia, Sri Lanka, Bangladesh, Cambodia and Pakistan”. Axiata also operates in Indonesia and has associate stakes in India’s Idea Cellular Ltd and Singapore’s M1 Ltd, but these were not named in the statement.

In October last year, Axiata’s 66.5%-owned Indonesian subsidiary, PT XL Axiata Tbk, was left with about 6,500 towers after it sold 3,500 communication towers to telecoms infrastructure firm PT Solusi Tunas Pratama Tbk for IDR5.6 trillion (US$460 million). XL is leasing them back for 10 years to pare its debt. It is understood that Indonesia’s regulation on foreign ownership of telecoms towers had complicated previous attempts to float Axiata’s global tower business. XL had previously said it could sell more towers.

As it is, Axiata says the MTC deal will not materially impact its earnings for the current year ending Dec 31, but did not provide forward guidance in its Oct 2 statement.

With some luck and plenty of hard work, Axiata’s newly acquired platform in Myanmar could turn into another cash cow for the group. In the meantime, however, analysts do not expect edotco to materially boost Axiata’s numbers for at least a year.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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