AXIATA is disposing its Myanmar tower assets entity for USD150m, which translates to 1.2x FY23 EV/EBITDA. This implies a discount versus OCK (6.1x) and Indonesian peers - which we attribute to political risks in Myanmar. Despite the tepid sale valuations, we are positive on this sale as it enhances Edotco’s appeal to new investors. We cut our FY24-25F earnings by 2% each, lower our TP by 2% to RM3.05 but maintain our OUTPERFORM call.

Disposal to local purchaser. AXIATA’s 63%-owned tower unit, Edotco has entered into a sale agreement to dispose its entire 87.5% stake in Edotco Myanmar Ltd (EMM) for USD150m (RM713m) in cash. The entire proceeds will be re-deployed to reduce debt. This disposal is subject to regulatory approvals and targeted for completion within 12 months. We understand that the purchaser of EMM is Pun Tower Investments Ltd, which is ultimately 100% owned by Serge Pun. The latter is the owner of the Myanmar-focused Yoma Group of companies.

Was revealed earlier in 4QFY23. To recap, as at 4QFY23, Edotco owns 2,128 towers and manages 945 sites at Myanmar. This is in comparison to Edotco’s total portfolio (excluding EMM) of 32,883 towers and 22,858 managed sites. In 4QFY23, EMM was reclassified as ‘asset held for sale’ on the back of ongoing negotiations with a potential buyer. Additionally, the group recognized asset impairments of RM889m for EMM in 4QFY23 in anticipation of its impending sale. In FY23, EMM contributed RM315m in top line and RM280m in EBITDA (2.7% of group EBITDA), which translates to superior EBITDA margins of 89%. In addition, its tower tenancy ratios were high (2.0x) and lease payments were prompt.

Paltry sale valuation. This disposal translates to an estimated sale valuation of 1.2x FY23 EV/EBITDA. This implies a discount versus Malaysian peer OCK, which is currently trading at 6.1x FY23 EV/EBITDA, and owns c. 1,200 towers in Myanmar with estimated book value of USD100m. Meanwhile, this sale also translates to a discount vis-à-vis Indonesian tower operators that currently trade at 10x FY24F EV/EBITDA. Nevertheless, we believe the discount is partly justified by significant political risks in Myanmar.

Positive as Edotco is finally investable. In spite of the slight loss in EMM’s contribution and tepid sale valuation, we are positive on this disposal. This is because it will result in the removal of ESG concerns that previously weighed on Edotco’s appeal to new investors. To recap, Myanmar is ruled by a military regime following a coup in 2021 that overthrew its democratically elected government. Meanwhile, Edotco is actively courting strategic investors to raise capital for its expansion plans, particularly in the Philippines. This is also aligned with AXIATA’s intentions to pare down its debt via sales proceeds from Edotco’s stake sale.

Unlocks trapped monies. Post disposal, we estimate that AXIATA’s FY24F net debt/EBITDA will reduce slightly to 2.19x (from 2.21x). Nevertheless, on a positive note, we believe that this disposal enables AXIATA to unlock EMM’s estimated cash holdings of RM390m. Recall that AXIATA alluded that it was challenging to secure approval from the Myanmar government to repatriate funds, particularly if the amount is significant.

Expect swift and clean exit. We believe the process of securing regulatory approvals from the Myanmar government would be smooth given EMM’s disposal to a local buyer. As such, this would enable Edotco to reach its targeted departure from Myanmar by 2024.

Forecasts. Our FY24F-25F earnings are lowered by 2% to reflect the removal of EMM’s contribution.

Valuations. Our Sum-of-Parts TP is correspondingly reduced by 2% to RM3.05 (from RM3.10) (refer below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like AXIATA for: (i) its plans to deleverage and strengthen its balance sheet, (ii) growth prospects for digital telcos and tower assets 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 digital telcos at frontier markets (e.g. Robi Bangladesh, Dialog Sri Lanka, Smart Cambodia), (ii) gestational earnings and cash flows drag from Link Net’s aggressive expansion, and (iii) capex up-cycle from looming implementation of 5G in Indonesia.

Source: Kenanga Research - 5 Apr 2024