Axiata Group - MARKET PERFORM - 11 JUNE 2012

Axiata has approached its 19%-owned associate company – Idea Cellular (“Idea”) to build a unified transnational  telecom tower company for Southeast Asian markets, according to an Indian press report. Idea’s towers are believed to have a  value of about USD600m, the report said, citing sources. No decision has been concluded thus far as Idea’s largest shareholder – Aditya Birla is still reviewing the financial viability of the proposal.  India’s 2G spectrum auction process is targeted to commence from August 6 despite the country’s authority having yet to determine the minimum base auction price. We are keeping our FY12-FY14 earning's forecasts unchanged at this juncture pending further clarifications from management. We are maintaining our MARKET PERFORM rating on Axiata with an unchanged TP of RM5.52, based on a targeted EV/forward EBITDA of 7.1x. 

Eyeing Idea’s tower business for transnational tower company. According to the Times of India, Axiata has approached Aditya Birla Group, which owns 25.3% of Idea Cellular, to build a multinational tower company with operations across Southeast Asian markets. Axiata is believed to have a plan to acquire or merge more than 8k towers belonging to the Indian mobile operator as it looks to create a unified tower entity with a presence in seven other nations. Idea’s towers are believed  to be valued at about USD600m, the report said, citing sources.    

India’s 2G spectrum auction process to begin from August 6.  The same press also reported on Tuesday that India’s Empowered Group of Ministers has decided to initiate an auction of the spectrum (freed by the cancellation of 2G licences by the Supreme Court) from August 6. The panel has recommended that at least 8 slots in block of 1.25MHz spectrum, amounting to 10MHz to be offered in the auction, although no decision was made on the base price for the auction. To recap, the auction base price proposed by the regulator earlier was nearly 10 times what the earlier companies had paid in 2008 for it and this has created various disputes between the industry as well as countries. We understand that Idea paid Rs. 684.59 crores (or USD140m) for its licenses in 2008.

Remarkably challenging project. While we are positive on the telecom tower project, which if materialises could unlock shareholders value; the project seems exceptionally challenging at this juncture, in our view.  The reason is that the project may, to a certain extent, be subjected to the respective country's regulatory issues as tower businesses in some countries may be subjected to political or national-security issue. On top of that, the financial viability of the project is still vague at present.  Aditya Birla will only be participating in the proposed transnational tower after the financial viability and its diverse regulatory framework issues are ironed out.        

No change in our FY12-FY14 earnings forecasts. We do not expect any financial impact to Axiata at this juncture given that the project, if any, is still at its very preliminary stage. We are keeping our FY12-FY14 earnings forecasts unchanged at this juncture pending more clarifications from management.   

Valuation remains unchanged. We are maintaining our Axiata’s target price at RM5.52 based on an unchanged targeted FY12 EV/forward EBITDA of 7.1x (+1.5SD).  

Source: Kenanga