Axiata has concluded the sale of its ~80.0% stake in Ncell to Spectrlite. The total consideration for the disposal comprises i) fixed consideration of USD50.0mn and ii) conditional consideration contingent upon the future business performance and distributions declared by Ncell until 2029 and any windfall gains secured by Spectrlite during this period. Overall, we view that the clean exit would help alleviate the persistent concerns about Axiata’s investments in frontier markets. As we removed Ncell from our SOTP valuation, the impact is marginal as we arrive at a slightly lower TP of RM2.32 (previously RM2.35). Maintain Sell. Concluded Sale of Ncell to Spectrlite

• Shortly after alluding to its decision to exit Nepal, Axiata Group Bhd (Axiata) announced that it has concluded the sale of Reynolds Holdings Ltd (Reynolds), which owns ~80.0% equity stake in Ncell Axiata Ltd (Ncell) to Spectrlite UK Ltd (Spectrlite). Spectrlite is fully owned by Satish Lal Acharya, who is of Nepali origin. He has been involved in investments in the telecom sector in Nepal and in other countries for over two decades.

• The total consideration for the disposal comprises: i) fixed consideration of USD50.0mn, and ii) conditional consideration contingent upon the future business performance and distributions declared by Ncell until 2029, and any windfall gains secured by the Spectrlite during this period. Both the fixed consideration and conditional consideration are payable in cash – refer to Appendix 1 for more details.

• According to Axiata, the decision to exit Nepal was upon a thorough evaluation of the country’s prevailing business environment. The conclusion drawn was that continuing operations was no longer sustainable for Axiata under the present conditions of unfair taxation (with a potential tax liability of USD433.6mn which the government of Nepal and its tax authority has failed to withdraw – refer to Appendix 2 for more details), and regulatory and licensing uncertainties (with expiry of Ncell’s mobile license in 2029).

• Additionally, the group’s decision to exit had also taken into consideration Ncell’s deteriorating financial performance on the back of significant structural changes in the industry, including declining voice revenue. From 2015 to the last 12 months, ending in June 2023, Ncell’s revenue and net profit declined by 33.8% and 74.6%, respectively.

• Of note, the disposal has enabled Axiata a clean exit. Ncell will retain full responsibility for its business and any of its liabilities, while the purchaser will further indemnify Axiata against existing and future Nepalese tax claims in relation to Ncell.

Our View:

• We view it meaningful to assess the sale consideration based on PBV versus metrics like PE, considering i) Ncell’s deteriorating financial performance and ii) the risks associated with the expiry of Ncell’s mobile license in 2029.

• Against Ncell’s guided book value of RM378mn post recent impairment, the fixed consideration of USD50mn (RM233.5mn based on USD/RM of RM4.67) implies a PBV of ~0.6x. Despite the discount, we view it as justified by: i) Axiata’s indemnity against the existing sizeable and future Nepalese tax claims, and although less upbeat, ii) potential upside from the conditional consideration, which includes any windfall gains.

• In terms of financial impact, as we removed Ncell’s contributions, our FY23F/FY24F/FY25F earnings estimates are lowered by -3.1%/-16.1%/- 12.9%.

Valuation & Recommendation

• Overall, we view that the clean exit would help alleviate the persistent concerns about Axiata’s investments in frontier markets. As we removed Ncell from our SOTP valuation, the impact is marginal as we arrive at a slightly lower TP of RM2.32 (previously RM2.35). Maintain Sell.

• Key downside risks include heightened competition, macroeconomic headwinds, and regulatory uncertainties.

Source: TA Research - 4 Dec 2023