• Maintain BUY and MYR3.40 TP (SOP), 44% upside. XL Axiata's (XL) (EXCL IJ, BUY, TP: IDR3,170) merger with Smartfren (FREN) marks another significant milestone in Axiata's portfolio optimisation strategy with proceeds from the partial monetisation of XL to be used to pare debt. We continue to like the stock for its improving risk-reward with balance sheet deleveraging and operational improvements as share price catalysts. Our TP bakes in a 2% premium.
• Share swap deal. Axiata's Indonesian mobile subsidiary XL has announced a proposed merger with FREN, Indonesia's smallest/fourth MNO. The merger will see XL issuing 5.1bn new shares to Sinarmas Group (Sinarmas) for its stake in FREN based on an agreed merger ratio of 72:28 (at IDR2,350 per XL share/IDR25 per FREN share). Axiata's stake in XL will be diluted to 47.9% post-merger (from 66.5%), with Sinarmas holding 21.7%. A subsequent share equalisation will see Sinarmas acquire an additional 13.1% from Axiata, resulting in both having equal stake of 34.8% each in the merged entity. XL's listing status will be retained and it will be renamed as XLSmart Telecom (XLS).
• Merger rationale. The merger would: i) Improve market conduct with a three-player market created, allowing for further re-pricing of tariffs, ii) drive good scale benefits (access to more spectrum, capex, and opex synergies), and iii) improve financial resilience. Merger synergies were guided at USD300-400m p.a. pre-tax post completion, consistent with the guided synergies from the Indosat-Hutchison (ISAT IJ, BUY, TP: IDR3,125) merger in 2022, although we note the latter's consolidation is significantly larger in scope. Post merger, XLS' subscriber market share will rise to 27% (from 17%), on par with Indonesia's second largest player ISAT. There would be a 34% jump in consolidated revenue post-merger though EBITDA uplift is less proportionate (+ 29%), given FREN's lower EBITDA margin. Management expects the bulk of the synergies (capex and opex) from network integration and IT via more targeted investments and the removal of duplicate sites.
• Value accretion of MYR0.8bn for Axiata, USD475m proceeds from partial monetisation of XL to Sinarmas will be used to pare debt - likely to offset the earnings void from XL's deconsolidation. Management confirmed proceeds from the sale of additional XL shares of MYR2.1bn will be used to pare debt (3Q24: MYR22.2bn, of which MYR8.4bn is in USD equivalent at the holding company level). Assuming the merger was in effect, 9M24 net debt/EBITDA would decline to 2.48x from 2.59x while gearing improves from 1.21x to 0.77x. Axiata's market valuation post-merger will also see a net USD0.2bn uplift as its lower stake post-merger is more than offset by USD475m proceeds from the sell-down in XL to Sinarmas. 9M24 PATAMI should improve to MYR1.22bn from MYR1.17bn despite the deconsolidation of XL's earnings post-merger (as a 34.8% associate), thanks to lower interest charges from lowered debt.

Source: RHB Research - 12 Dec 2024