This article first appeared in The Edge Financial Daily, on December 23, 2015.
Axiata Group Bhd
(Dec 22, RM6.20)
Upgrade to outperform with a higher target price (TP) of RM6.92: Axiata Group Bhd is effectively buying an 80% stake in Ncell from TeliaSonera for US$1.37 billion (RM5.9 billion) cash. Ncell is the largest mobile operator in Nepal with 13 million subscribers and a subscriber/revenue market share of 48.8%/57.5%.
The deal is expected to be completed by the second quarter of 2016. This news comes as a positive surprise as Axiata has not spoken about expanding into Nepal nor has there been any prior market talk on this.
Axiata will fund the acquisition with a US$1 billion sukuk issuance plus a US$365 million bridging loan. It will use internal cash and raise further debt to pay off the bridging loan within six to 12 months.
We project Axiata’s net debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) to rise from 1.5 times at end-financial year 2015 (FY15) to a still-manageable 1.9 times/1.8 times at end-FY16/FY17.
Ncell is valued at a reasonably attractive five times trailing enterprise value (EV)/Ebitda versus the average 5.7 times for South Asian telcos and 8.3 times for Axiata.
Nepal has a young population (68% below the age of 35). Coupled with still-low unique mobile user (51.1%) and mobile broadband/smartphone (21.5%/18%) penetration, there is room for future growth in our view. Ncell is also doing well, achieving revenue and Ebitda compound annual growth rates of 19.9% and 26.7% respectively between FY13 and FY15.
Also, its revenue market share has risen continuously from 35.4% in 2011 to 57.5% in FY15.
We estimate that the acquisition of the 80% stake in Ncell will boost Axiata’s net profit by 13.2% in FY16 (a nine-month impact) and 14.4% in FY17. This is after factoring in the interest cost (3.5%) of debt raised, minority interest (20%) and assuming the current foreign exchange rate of 24.7 Nepalese rupees per ringgit. Axiata said its dividend policy would not be affected by the acquisition.
Key risks include all of Ncell’s spectrum rights expiring in 2019. Axiata may have to pay spectrum fees to extend its licences, with the exact amount unknown. New mobile players may also enter Nepal in the future, as multiple parties own spectrum rights. TeliaSonera, too, had issues repatriating cash previously.
Axiata said it had been assured by the senior authorities in Nepal that this will not be a problem with proper documentation.
We are positive on the Ncell acquisition, as it is earnings-accretive and the valuation is reasonable. We raise our sum-of-parts-based TP for Axiata to RM6.92, valuing Ncell at six times FY16 EV/Ebitda. Axiata remains our top Malaysian telco pick.
Key rerating catalysts include a gradual recovery at Celcom and stronger earnings growth at XL in the coming quarters, as well as an earnings boost from Ncell. — Kenanga Research, Dec 22
AXIATA (6888) 亞通 - Axiata’s Ncell deal a positive surprise
http://www.theedgemarkets.com
