We view the move by Axiata to merge Hello, its Opco in Cambodia, with the nation’s No.2 operator Smart Mobile as logical and timely to cement its position in a crowded hyper-competitive market. The deal should accelerate the pace ofconsolidation, with the weaker players eventually removed. While the implied valuation of >10x EV/EBITDA appears rich, we think this is justified by Smart’s strong market share gains over the past two years. The deal is EPS positive from the onset (+1-2% for FY13). We upgrade our FV on Axiata to RM7.02 after raising our SOP valuation on Celcom. However, we downgrade our call to NEUTRAL from BUY given the stock’s strong 10% share price gain in a week.
Getting smart. Axiata is acquiring 100% of Latelz, the owner of the Smart mobile brand in Cambodia, and merging it with its wholly-owned mobile operating company (Opco), Hello, which is loss-making. The deal was motivated by the extremely stiff competition in a crowded market where nine operators vie for a population of 15m (headline mobile tele-density above 100%). The acquisition will propel its subscriber share to 25% from 13% currently (fourth place), behind the leader and State-owned operator, Metfone, which has a 35% share. Most importantly, it solidifies Axiata’s position in a consolidating marketplace, allowing the group to gain economies of scale and to extract revenue and cost synergies. We view the in-country consolidation move positively. The transaction is slated to be completed in 1Q2013.
30%+ revenue share target. Axiata is targeting subscriber/revenue market shares of 30% in the longer-term from the merger. We think this is an achievable target in a typically three-player dominated market, as the smaller telcos and green-field operators will eventually be weeded out through a process of M&As and terminations. Although management did not disclose the potential cost savings from the deal, we think this could be significant as Smart is well-managed and adopts a low cost structure. We gather that both operators possess complementary brands, which should reduce the risk of cannibalization. Revenue synergies would, however, depend on the dynamics of pricing (potential for tariff optimization) in a market that has experienced substantial value destruction over the last three years. The proforma EBITDA margin of the merged outfit is estimated at 16% for 1HFY12 based on revenue of USD45.1m, which management hopes to improve over time.
Risks in regulatory framework. We believe there is a lack of consistency in the management of the scarce spectrum resources, with allocations granted in a non-transparent manner in Cambodia. The acquisition of Latelz should minimize the risk and uncertainty with respect to the spectrum as Hello operates on a build transfer operate (BTO) model while Latelz has a 25-year operating licence.
Getting smart. Axiata is acquiring 100% of Latelz, the owner of the Smart mobile brand in Cambodia, and merging it with its wholly-owned mobile operating company (Opco), Hello, which is loss-making. The deal was motivated by the extremely stiff competition in a crowded market where nine operators vie for a population of 15m (headline mobile tele-density above 100%). The acquisition will propel its subscriber share to 25% from 13% currently (fourth place), behind the leader and State-owned operator, Metfone, which has a 35% share. Most importantly, it solidifies Axiata’s position in a consolidating marketplace, allowing the group to gain economies of scale and to extract revenue and cost synergies. We view the in-country consolidation move positively. The transaction is slated to be completed in 1Q2013.
30%+ revenue share target. Axiata is targeting subscriber/revenue market shares of 30% in the longer-term from the merger. We think this is an achievable target in a typically three-player dominated market, as the smaller telcos and green-field operators will eventually be weeded out through a process of M&As and terminations. Although management did not disclose the potential cost savings from the deal, we think this could be significant as Smart is well-managed and adopts a low cost structure. We gather that both operators possess complementary brands, which should reduce the risk of cannibalization. Revenue synergies would, however, depend on the dynamics of pricing (potential for tariff optimization) in a market that has experienced substantial value destruction over the last three years. The proforma EBITDA margin of the merged outfit is estimated at 16% for 1HFY12 based on revenue of USD45.1m, which management hopes to improve over time.
Risks in regulatory framework. We believe there is a lack of consistency in the management of the scarce spectrum resources, with allocations granted in a non-transparent manner in Cambodia. The acquisition of Latelz should minimize the risk and uncertainty with respect to the spectrum as Hello operates on a build transfer operate (BTO) model while Latelz has a 25-year operating licence.
VALUATION & RECOMMENDATION
SOP FV revised to RM7.02. We are applying a higher target PER of 16.5x to value Celcom (from 15x previously) given its strong operational execution YTD and our expectations that the telco will report another strong quarter in 4QFY12. This bumps up our FV on Axiata to RM7.02 from RM6.62 previously. As Axiata’s share price has rallied over 10% in over a week, we are downgrading the stock to NEUTRAL from BUY.
SOP FV revised to RM7.02. We are applying a higher target PER of 16.5x to value Celcom (from 15x previously) given its strong operational execution YTD and our expectations that the telco will report another strong quarter in 4QFY12. This bumps up our FV on Axiata to RM7.02 from RM6.62 previously. As Axiata’s share price has rallied over 10% in over a week, we are downgrading the stock to NEUTRAL from BUY.
Source: OSK
No comments:
Post a Comment