Axiata’s regional presence a ‘good fit’ for China Mobile

by **Cals** Fri 08 Aug 2014, 17:29

Business & Markets 2014

Written by PublicInvest Research

Friday, 08 August 2014 09:46

Axiata Group Bhd
(Aug 7, RM6.96)
Maintain neutral with target price of RM6.92: China Mobile Ltd, the world’s largest wireless carrier, has been on the lookout for overseas acquisitions to extend its geographical reach beyond its core Greater China market and it had a cash pile of US$69 billion (RM221.5 billion) as at March 2014.
In June 2014, it struck a deal to buy 18% of True Corp Pcl (Thailand’s third-largest telecommunications company [telco]) for US$881 million. From a geographical perspective, Axiata’s regional presence will be a good fit for China Mobile, which is seeking a stronger telco footprint in Asia. Axiata is a well-run group with a strong operating presence in Malaysia, Indonesia, Bangladesh, Sri Lanka and Cambodia. Taking a stake in Axiata will enable China Mobile to jump-start its presence in Axiata’s key operating countries.
While we view the deal as positive for Axiata, we remain sceptical of a deal in the near term because: (i) Khazanah Nasional Bhd is unlikely to pare down its stake in Axiata to a non-controlling level from its current shareholding of 38.8% unless China Mobile is willing to offer a huge premium and Khazanah decides Axiata is not part of its strategic holdings; (ii) Axiata is currently undergoing changes (for example, the integration of its Indonesian subsidiary PT XL Axiata Tbk with PT Axis Telekom Indonesia), which may temporarily dampen its financial performance and may not reflect the group’s long-term potential; and (iii) Axiata and China Mobile are currently trading at enterprise value/earnings before interest, taxes, depreciation and amortisation of 8.6 times and 4.0 times respectively — the significant valuation premium of Axiata over China Mobile will limit the premium that China Mobile is willing to pay.
We reiterate our “neutral” call on Axiata with a target price of RM6.92 based on sum-of-parts valuation. While we like Axiata’s regional growth plans and potential initial public offering of its tower assets (likely to be in 2015), we believe foreign exchange volatility and PT XL Axiata’s integration with loss-making PT Axis may affect the group’s short-term financial performance. — PublicInvest Research, Aug 7

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This article first appeared in The Edge Financial Daily, on August 8, 2014.[/size]