THE BUZZ
While Etisalat’s planned sale of its entire stake in XL
Axiata (XL) is positive for XL’s share liquidity, our checks reveal that Axiata
is inclined towards raising its current 66.6% stake although management would
have to assess the potential regulatory issues from such a move and that it
could raise the ire of BAPEPAM. There are additional tax benefits for XL
with an
enhanced stock liquidity, which
Axiata would also have to consider. We are keeping our BUY recommendation on
Axiata, our top telecoms pick in Malaysia, based on SOP FV of RM5.80.
OUR TAKE
Calling it quits. Etisalat’s plan to dispose of its 13.3%
stake in XL Axiata for USD600-700m (RM1.8-2.1bn) caught us by surprise, more so
when media reports attributed the reason of the sale to a souring relationship. We gather from Axiata that it
has had no issue with the management of Etisalat, which is represented by a
single board seat on XL, and which has
been a silent partner since it bought into the telco in 2007 for USD438m.
The news came on the heels
of rumours that Qatar Telecom
(QTel), another Middle Eastern telco, may also be disposing of its
61% stake in Indonesia’s No. 2 mobile operator, Indosat. At its recent 4QFY11
results call, Indosat’s management refuted speculation that QTel is exiting.
Indonesia’s biggest mobile operator, Telkomsel, was also mired in a
shareholding tussle last year when its parent, Telkom, had wanted to buy out
SingTel’s 35% stake in the telco over policy disagreements.
Axiata keen to up its
stake? From our checks, we gather that Axiata does not rule out the
possibility of taking up a portion of Etisalat’s shares. However, the merits of
doing so would have to be considered given that the group already has a
majority stake and also full control over XL’s board and policy matters. Some
issues that need to be ironed out are: (i) additional returns on investments
from funds that could otherwise be channeled for potentially lucrative M&As
targets in India and Indo-China, (ii) regulatory challenges in Indonesia, and
(iii) XL’s share liquidity. XL benefits from a further 5% cut in
the corporate tax rate of 25% should its current free float rise to 40% from
20% (excluding the combined stakes of Axiata and Etisalat), which management is
likely to consider.
Maintain BUY.
Etisalat’s sale of XL does not change our positive view on Axiata, which recently gave a
dividend surprise, and in our opinion could well surprise further on capital
management in narrowing its dividend yield
gap with its peers. We are keeping our BUY recommendation on AXIATA,
based on a SOP FV of RM5.80. We continue to like the stock’s reasonable growth and exposure to
the more exciting mobile growth prospects overseas.
Source: OSK188
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