Dialog’s enlarged spectrum resources post the acquisition of Airtel Lanka will result in capex savings, a more efficient contiguous spectrum, and a new contiguous 2.6 GHz spectrum for the 5G roll-out in the future. We fine-tune down our FY24F earnings forecast by 1%, trim our TP by 3% to RM3.00 (from RM3.05) but maintain our OUTPERFORM call.

AXIATA’s 83%-owned Sri Lankan unit, Dialog Axiata PLC hosted a conference call to provide more clarity on its acquisition of Airtel Lanka. The key takeaways are as follows:-

Spectrum holdings will be larger and contiguous. Dialog reiterated the benefits from having enlarged spectrum resources post the acquisition of Airtel Lanka, which includes: (i) capex savings from increased capacity of 26 Hz per data customer (from 24 Hz), (ii) more efficient contiguous spectrum following a rearrangement, and (iii) a new contiguous 2.6 Ghz spectrum for future 5G roll-out. Therefore, post merger, Dialog is able to narrow the disparity with its competitors, in terms of Hz per data customer. Nevertheless, it will still remain significantly below its peers, namely SLT-Mobitel (60 Hz) and Hutch (53 Hz).

Guidance of post-merger valuation boost. After the merger, Dialog estimates a 53% uplift in its valuation that mainly emanates from: (i) lower network costs following the removal of overlapping sites, (ii) capex savings from larger and enhanced spectrum holdings, (iii) operational synergies for manpower and sales & marketing, (iv) redeployment of dismantled sites and equipment, and (v) market price stability as competition moderates. The synergies are expected to unfold over 24 months after the merger. Nevertheless, this is partially offset by integration costs and taxes.

Anticipate insignificant earnings drag. Post merger, Dialog’s FY24 revenue is expected to expand by 8% YoY. There will be immaterial profit dilution from Airtel Lanka given that it is expected to be EBITDA neutral within 6-12 months; and reach PATAMI break-even within 12 months following its consolidation. In addition, the impact to AXIATA’s net gearing is also expected to be marginal given Airtel Lanka’s net debt before legal day one is estimated to be less than USD15m.

Other key takeaways include:

1. Dialog expects the merger to be completed by 2QFY24 and its amalgamation with Airtel Lanka to be completed by 3QFY24.

2. Post-merger, Dialog’s market share is expected to expand to 64% (from 57%) following net subscriber adds of 3m.

3. Dialog will maintain Airtel as a separate brand to capitalize on its unique strengths.

4. In comparison to Dialog, Airtel Lanka’s prepaid ARPUs are 10%- 15% higher due to its strategy of promoting higher value packs.

5. Post removal of overlapping sites within the merged entity, Dialog expects net accretion of 500-1,500 sites from Airtel Lanka. This translates to a consolidation of more than 1,000 duplicated towers from Airtel Lanka’s pre-merger footprint of over 2,400 sites.

Forecasts. We fine-tune down our FY24F net profit forecast by 1% after consolidating Airtel Lanka.

Valuations. Our Sum-of-Parts TP of is lowered to RM3.00 (from RM3.05) (refer below). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 - 22 Apr 2024