AXIATA is reviewing Edotco’s recapitalization exercise in order to achieve attractive valuations. It also believes that the global interest rate upcycle has peaked, which suggests stable or lower finance costs moving forward. We maintain our forecasts, TP of RM3.00 and OUTPERFORM call.

We came away from AXIATA’s post-results briefing feeling neutral on recent developments that are largely within expectations. The key takeaways are as follows:

1. Plans to recapitalize Edotco are currently under review and re- evaluation. This is largely due to unfavourable market conditions for tower infrastructure companies at this juncture. Hence, the valuations that Tower Cos can achieve are currently unattractive. In spite of this, AXIATA believes that Edotco’s growth plans will remain intact, given its ability to generate internal funds for expansion.

2. AXIATA believes that the global interest rate up-cycle has peaked. Hence, this suggests the possibility of stable or lower finance costs for the group moving forward. In our view, the group’s interest rate exposure remains manageable, given that 64% of its borrowings are on a fixed rate basisas of 1QFY24. To recap, AXIATA currently has total debt of RM25.5b, primarily stemming from AXIATA HoldCo, Edotco, Dialog and XL.

3. AXIATA reiterated that its rationale for merging XL with Smarfren mainly emanates from: (i) merger cost synergies, and (ii) benefits from combined spectrum holdings. In particular, XL’s spectrum deficit compared to its two larger competitors (i.e. Telkomsel and Indosat) places it at a severe disadvantage for continued 4G network expansion and looming 5G roll-out. On top of that, the group believes there are synergies to unlock between Link Net and the merged entity.

Forecasts. Maintained.

Valuations. We also maintain our Sum-of-Parts TP of RM3.00 (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.

Risksto 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 flow drag from Link Net’s aggressive expansion, and (iii) capex up-cycle from looming implementation of 5G in Indonesia.

Source: Kenanga Research - 31 May 2024