No need for cash call - AXIATA

by **Cals** Mon 19 Aug 2013, 10:20

No need for cash call
Business & Markets 2013
Written by Maybank IB Research
Monday, 19 August 2013 09:58

Axiata Group Bhd
(Aug 16, RM6.91)
Maintain hold at RM6.90 with a target price of RM6.55: A review of Indonesian telecommunications company PT Axis Telekom's financials raises doubts about its abilities as a going concern. We expect Axiata Group's Indonesian unit, PT XL Axiata, to pay way below US$1 billion (RM3.28 billion), hence negating the need for a cash call. We believe Axiata Group could easily afford its share of equity raising from its Indian unit Idea Cellular Ltd (about RM400 million). Overall, the sector lacks rerating catalysts given rising bond yields. Maintain "hold" and RM6.55 target price.

A US$1 billion to US$1.5 billion price tag for Axis (as quoted in press reports) appears too high, in our view. Axis' major shareholder, Saudi Telecom Co, disclosed details of Axis' financials for the first time in its first half of 2013 (1H13) results. Axis' net debt stood at US$604 million as at June 2013, alongside a negative equity base of US$142 million. In addition, Axis lost US$192 million after tax in 1H13 (we estimate an earnings before interest, tax, depreciation and amortisation [Ebitda]) loss of about US$70 million).

We forecast XL's gearing at 96% by December 2013. Even at an acquisition enterprise value (EV) of US$1 billion, we estimate XL's gearing at only 164%. A cash call by XL is not necessary, in our view.

The Indonesian communications and information ministry has suggested a partial return of some of Axis' spectrum in the event of an XL-Axis merger. Since XL is almost purely after spectrum, we expect the eventual acquisition price to be lowered further.

About RM400 million would come from Axiata so that its stake in Idea remains unchanged at 20%. The funds are stipulated for licence renewal fees in 2015 and potential purchase of new spectrum. We estimate Axiata was holding about RM2.5 billion of cash outside the main operating entities (as at December 2012), and hence would have no issues funding Idea's cash call.

We maintain our forecasts pending the release of Axiata's 2Q13 results on Aug 30. We value Axiata on a sum-of-parts basis, with each operating entity valued using discounted cash flow. Axiata's Celcom and XL account for RM4.13 and RM1.12 per Axiata share respectively.

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Our target price implies an FY13 price-earnings ratio of 20.1 times EV/Ebitda of 7.8 times and net dividend yield of 4.2%. — Maybank IB Research, Aug 16

This article first appeared in The Edge Financial Daily, on August 19, 2013.