This article first appeared in The Edge Financial Daily, on December 28, 2015.

KUALA LUMPUR: Axiata Group Bhd’s adjusted leverage is estimated to rise to 2.6 times from two times for the last 12 months to September 2015 following its acquisition of an 80% stake in Nepal’s Ncell Pte Ltd given the debt-funded nature of the transaction, said Moody’s Investors Service.

Despite the slightly higher leverage, the rating agency said the acquisition allows Axiata to expand its regional footprint into Nepal, and provides the potential for further asset and investment diversification in a high-growth market.

“Furthermore, the acquisition is expected to be immediately earnings before interest, tax, depreciation and amortisation (Ebitda)-accretive. According to the group and based on the financial year ended Dec 31, 2014 (FY14) pro forma, Ncell will account for 9% of Axiata’s consolidated revenue and 19% of net profit, said Moody’s vice-president and senior analyst Gloria Tsuen in a statement last Thursday.

“We believe this is an opportunistic acquisition in an under-penetrated smartphone and broadband market.

“Although there are some risks associated with Nepal’s evolving regulatory environment and repatriation of cash, Axiata has the financial flexibility to absorb these challenges within its ratings level,” she added.

Tsuen also expects Axiata to consider asset monetisation opportunities such as a modest reduction in its shareholdings in current subsidiaries and an initial public offering of its regional tower subsidiary edotco Group Sdn Bhd in order to provide deleveraging if needed.

Axiata, through its wholly-owned subsidiary Axiata Investments (UK) Ltd, on Dec 21 signed a conditional sale and purchase agreement with TeliaSonera UTA Holdings BV and SEA Telecom Investments BV for the 100% acquisition of Reynolds Holdings Ltd for US$1.4 billion (RM6.01 billion).

The acquisition of Reynolds will effectively secure Axiata an 80% controlling stake in Ncell, a leading mobile operator in Nepal with 13 million mobile subscribers, representing a 48.8% subscriber market share and a revenue market share of 57.5%.

Tsuen expects Axiata’s revenue for FY15 and FY16 to grow by low- to mid-single-digit percentages, supported by stabilisation and recovery in Celcom Axiata Bhd in Malaysia and PT XL Axiata Tbk, as well as continued solid growth at Robi Axiata Ltd in Bangladesh and Dialog Axiata plc in Sri Lanka.

“Although adjusted Ebitda margins, including consolidation of Ncell, will remain under some pressure in 2016, we expect margins will be maintained [at] mid-40 levels, which is in line with Axiata’s rating parameters,” she said.

“Moody’s also expects Axiata’s cash flows to remain strained in the next one to two years, driven by the group’s progressive dividend payout ratio and elevated capital expenditure which we expect will remain around RM5 [billion] to RM6 billion in the next two years, as the group invests to upgrade its network.

“However, its stable earnings from diversified revenue sources, solid market positions and strong relationships with the Malaysian government will continue to support its rating,” Tsuen added.