Axiata Group Bhd
(Oct 2, RM7)
Maintain “neutral” with target price of RM6.92. Axiata Group’s (Axiata) Indonesian unit, PT XL Axiata Tbk (XL), announced it has agreed to sell 3,500 telecommunication towers to PT Solusi Tunas Pratama Tbk (STP) for 5.6 trillion rupiah (RM1.5 billion). Concurrently, XL also entered into a master tower lease agreement with STP to lease back the 3,500 towers for a period of 10 years.

The announcement was anticipated as XL had officially invited bids for its telco towers sale in July 2014. The sale is expected to be completed by end-2014 and proceeds will be used to pare down its debts incurred in the acquisition of PT Axis Telekom Indonesia in March.

Although the deal is value accretive to XL and will enable XL to strengthen its balance sheet, the valuation of nine times enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) for the towers sale is below listed Indonesian tower companies traded EV/Ebitda multiples of above 10 times.

In conjunction with the sale agreement, XL and STP also entered a master tower lease agreement whereby XL will lease back the 3,500 towers, approximately 35% of XL’s existing tower assets for a period of 10 years.  

XL’s rationale for the sale and leaseback transaction are that sale proceeds will be used to pare down its debts elevated partly due to the acquisition of Axis and will reduce its leverage of net debt or Ebitda of 3.2 times as at end of second quarter of 2014 to approximately 2.5 times post-completion of sale.

Strategic benefits of divesting non-core assets and freeing up capital which are in line with XL’s goal of asset-light business model. Furthermore, value accretive transaction for XL as the towers valuation of approximately nine times EV/Ebitda is net present value positive for XL.

The management indicated the transaction is expected to be earnings per share (EPS) accretive over the medium term but may result in around 200 basis point dilution in Ebitda margin in 2015.

However, the valuation of nine times EV/Ebitda for the towers sale is below market expectations as listed Indonesian tower companies such as PT Sarana Merana Nusantara Tbk and PT Tower Bersama Infrastructure Tbk are trading at 13 times and 15 times EV/Ebitda respectively.

While we like Axiata’s regional growth plans and potential initial public offerings  of its tower assets (excluding Indonesia), we believe forex volatility, XL’s integration with loss-making Axis and Celcom Axiata Bhd’s information technology and network issues may affect the group’s near-term financial performance. — Public Investment Bank Bhd, Oct 2




This article first appeared in The Edge Financial Daily, on October 3, 2014.