Axiata Group - Smart deal BUY

- We re-affirm our BUY call on Axiata at a higher fair value of RM7.00/share (from RM6.70/share previously) following the acquisition of Latelz in Cambodia. We now value Axiata at its SOP value (vs. at a 5% discount previously) to reflect increasingly strong growth traction both from an organic and acquisitive standpoint. Axiata remains our top sector pick. 

- Axiata announced the acquisition of Latelz Company Limited, which operates Cambodia’s 2^nd  largest telco, Smart Mobile for cash consideration of USD155mil/USD180mil implied EV (RM481mil/RM558mil implied EV). Upon completion, Axiata will have a 90% stake in the merged (Hello-Smart) entity. 

- Although valuation of the deal at 10x FY13F EV/EBITDA is at a premium to Axiata’s 7x, we are positive on the structural benefits arising from the deal as it strengthens Axiata’s foothold in a consolidating market. Hello is thrusted to become the 2^nd  largest telco with a 25% subs share from 4^th position with 13% share (See Chart 1). 

- More importantly, Hello now stands to reap the benefits of a healthier eco-system from industry consolidation i.e. (1) ARPU stabilisation (Smart and Hello were most aggressive on pricing to gain subs share in the past); (2) Enlarged subs share; (3) Lower subs acquisition cost; (4) The weeding out of smaller players; (5) More efficient infra utilisation. 

- Although the pre-merged Hello is one of the largest Cambodian telcos, it has been loss making over the past year due to aggressive price competition given a cramped 8-player market in a country with only 15mil population. Management foresees the number of players shrinking to 3-5 in the near future from 7 (post Hello-Smart merger). The top 3 Cambodian telcos now control 88% subs share with the remaining shared between 4 other telcos. 

- We raise our FY13F-14F earnings by 1%-3% to reflect the merger. Management guides for Smart to see up to 80% EBITDA growth in FY13F. A key earnings driver for the merged entity will be EBITDA margin improvement derived from cost rationalisation and ARPU improvement.  Long term EBITDA margins are targeted at the low 30% range vs. 22% and 11% for Smart and Hello currently (16% blended).Group targets >30% subs share from 25% post merger.

- Management does not rule out similar acquisitions (driven by in-country consolidation) in its other regional markets. Bear in mind that this USD155mil deal is only a fraction of the USD1.5bil credit line that Axiata has in place and as such, we see significant room for further acquisitive growth. Axiata remains the cheapest local telco at 7.6x FY13F EV/EBITDA (industry average 10x). Key catalysts: (1) M&As and potential divestments in the region; (2) Dividend surprise.  

Source: AmeSecurities