AXIATA is disposing of its 80% stake in Ncell Nepal for a fixed sum of USD50m and conditional consideration. We are neutral on this transaction as it was previously guided by AXIATA that it was willing to compromise on valuations and condition so long that it can have a clean exit from Nepal. We lower our TP by 13% to RM3.10 (from RM3.55), but maintain our forecasts and OUTPERFORM call.

Sells Ncell for USD50m fixed consideration. AXIATA is disposing of its 80% equity stake in Ncell Nepal to Specter Spectrlite UK Ltd (SSUK) under the following terms: (i) fixed consideration of USD50m, and (ii) a conditional consideration. The latter comprises a share of the forward distributions declared by Ncell until 2029. This includes net distributions and any windfall gains secured by SSUK. Meanwhile, for the fixed consideration, following completion of the sale, USD5m is payable within six months, whilst the remainder is payable after four years.

Under the terms of AXIATA’s sale, SSUK will indemnify AXIATA against existing and future Nepalese tax claims in relation to NCell. This is on top of NCell retaining full responsibility for its business and any liabilities.

Highly challenging regulatory environment at Nepal. The decision to sell was driven by AXIATA’s view that it was unsustainable for Ncell to operate under unfair taxation and regulatory uncertainties in Nepal. This was underpinned by potential risks of: (i) double taxation on capital gains tax (CGT), (ii) expropriation of AXIATA’s stake by the Nepalese government, and (iii) non-renewal of NCell’s mobile license following its expiry in 2029.

Original asset purchase price was USD1.37b back in 2016.To recap, back in 2016, AXIATA acquired Ncell from Reynolds Holdings Ltd (RHL) for USD1.37b. CGT was imposed on NCell and AXIATA after Nepal’s efforts to collect tax from RHL failed. Therefore, in 2016-2020, Ncell settled CGT totalling NPR47b (c. USD422m) and received confirmation from the Large Taxpayers Office (LTPO) of Nepal in 2020 that no further CGT taxes remain outstanding. In spite of this, in Jan 2021, LTPO further assessed NCell for NPR57.9b (c. USD433.6m) on the same transaction. Thus far, collection of this sum has been suspended due to an interim order by the Nepalese supreme court following NCell’s petition.

Unreasonable double capital gains tax assessment. Recently in June 2023, the International Centre for the Settlement of Investment Disputes, ruled in favour of AXIATA. However, the Nepalese government and LTPO did not withdraw the Jan 2021 assessment, which likely carries a present day value of USD433.6m (inclusive of interest and penalties). The combined value of this, coupled with CGT settled by AXIATA earlier (USD422m), translates to 63% of NCell’s purchase price (USD1.37b).

No surprise as it was well guided. We are neutral on this announcement as AXIATA had previously guided that it was willing to compromise and accept lower sale valuations of NCell. This was on condition that it can achieve its main priority of having a clean exit from Nepal. Moreover, we believe it is in AXIATA’s best interest to dispose NCell, given untenable conditions, and coupled with risks of future legal repercussions. Moreover, AXIATA is able to remove the drag from NCell, which was revealed to be earnings dilutive. Lastly, based on AXIATA’s earlier indication, Ncell’s estimated fair value on its books amounts to RM378m. This includes forex reserves of RM360m that fluctuates in accordance with the exchange rate movement between Nepalese rupee and MYR. Therefore, we believe there is a possibility of AXIATA booking in a slight disposal gain on this sale.

Expected bargain sale valuations. Based solely on the fixed consideration price of USD50m (RM235m), this translates to estimated sale valuation of 0.3x FY24F EV/EBITDA for NCell. This appears low in comparison to the 3-year average valuation for AXIATA’s listed assets in South Asia –including Robi Bangladesh (5.1x) and Dialog Sri Lanka (2.4x). Moreover, recall that back in 2016, AXIATA purchased NCell at USD1.37b which implies significantly higher trailing EV/EBITDA of 5x. On the bright side, although the sale amount appears low versus its original purchase price of RM6.4b (based on current exchange rate), it is partially cushioned by NCell’s total dividend contribution of RM2.2b over 2016-23.

Forecasts. Maintained as we had earlier removed NCell’s contribution from our estimates.

We had earlier ascribed a zero value on Ncell in our Sum-of-Parts (SoP) valuation. However, we recalibrate our SoP down by 13% to RM3.10 (from RM3.55) to better reflect the listing status of its overseas units (i.e. CDB, XL, Robi and Dialog). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like AXIATA for: (i) its plans to deleverage and strengthen its balance sheet, (ii) growth prospects for OpCos at emerging markets, and (iii) strong asset monetization prospects for edotco and its digital businesses. Maintain OUTPERFORM.

Risks to our call include: (i) a strong USD may weigh on the performance of its OpCos at frontier markets (e.g. Robi Bangladesh Dialog Sri Lanka, Smart Cambodia, Myanmar tower assets), (ii) further interest cost drag from continuous rate hikes, and (iii) macro headwinds weighing on Opcos at emerging markets.

Source: Kenanga Research - 4 Dec 2023