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This article first appeared in The Edge Financial Daily on April 19, 2019

Axiata Group Bhd
(April 18, RM4.08)
Maintain hold with an unchanged fair value (FV) of RM3.86:
We maintain our “hold” call on Axiata Group Bhd with unchanged forecasts and an FV of RM3.86 a share, which incorporates a 25% holding company discount into our sum-of-parts-based FV of RM5.14 a share. This implies a financial year 2019 forecast (FY19F) enterprise value (EV)/earnings before interest, taxes, depreciation and amortisation (Ebitda) of five times, two standard deviations below its two-year average of seven times.

Following our update last week, Axiata has received a letter from Nepal’s Large Taxpayers Office confirming that the outstanding capital gains tax (CGT) of 39 billion Nepalese rupees (RM1.5 billion) should be deposited by April 22, 2019.

Recall that Nepal’s Supreme Court has ordered that the CGT arising from the sale of an 80% equity stake in Ncell for US$1.4 billion (RM5.81 billion) by TeliaSonera Norway Nepal Holdings in December 2015 should be borne by Ncell and the buyer Axiata, following a public interest litigation filed by a group of Nepalese nationals.

According to the Himalayan Times, the CGT payable is 62.6 billion rupees, of which Axiata has already paid instalments of 23.3 billion rupees, including late interest charges.

As such, the final balance CGT payable will be lower by six billion rupees versus our earlier assumption of 45 billion rupees.

The letter does not indicate that Axiata needs to pay the entire 63 billion rupees first before deducting the instalments upon a formal application, as earlier reported by the media. Hence, we estimate that this could raise Axiata’s FY19F net debt/Ebitda from 1.6 times to only 1.7 times, versus our earlier estimate of 1.8 times.

If the group were to make a provision this year, Axiata’s FY19F net profit of RM1.3 billion could reverse to a loss of RM200 million.

While we maintain the view that the court verdict is unreasonable, Axiata’s regulatory risk profile has worsened as the group may not have any further legal recourse except to pursue an uncertain claim from Telia.

Additionally, the Supreme Court has ordered that the distribution of dividends and any sale of Ncell shares should not be granted until the tax obligation is satisfied.

Even though Axiata currently trades at a bargain FY19F EV/Ebitda of five times versus Maxis’ 12 times, the group’s deteriorating overseas risk profile amid intense mobile completion both locally and regionally could limit any medium-term share price upside. — AmInvestment Bank, April 18

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