Axiata Group Bhd - In-country consolidation in Sri Lanka?

News     Business Standard (an Indian newspaper) reported that Axiata had approached Bharti Airtel to acquire the Indian operator’s business in Sri Lanka as well as approached Hutchison to acquire the latter’s Sri Lankan operations.

 The Indian daily newspaper said Airtel Lanka, the operating company of Bharti Airtel in Sri Lanka, has an estimated market share of 8%-9% vs. Dialog Axiata of 40%.

 Airtel Lanka has 1.7m customers across 25 administrative districts and offers 3.5G services in the major Sri Lankan towns and has a distribution network of 42k retailers.

Comments  The news is not a surprise to us as Axiata has always reiterated its forward strategy (to the investor community) to focus on in-country consolidation within its subsidiary companies.

 We understand that Bharti Airtel has invested over USD325m in its Sri Lanka operations. Airtel Lanka is currently providing an islandwide coverage, supported by 1600 towers covering all 25 districts. Of these, over 650 towers offer 3G services to each region.

 In FY12, Dialog contributed 7.7% to the Axiata Group’s total turnover of RM17.6b. Its normalised PATMI, meanwhile, accounted for 6.2% of the Axiata Group’s core net profit of RM2.8b.

 Funding is not an issue in our view should any incountry consolidation exercise materialise. As at endFY12, the group has a cash pile of RM7.9b with a gross debt/EBITDA ratio of 1.7x. The ratio is still below its optimal capital structure of 2.0-2.2x gross debt/EBITDA level, suggesting that Axiata still has room to leverage up its balance sheet if needed.  We estimate that Axiata can raise up to RM3.6b if the company decides to maximise its optimal capital structure.

Outlook  The group’s data business is expected to continue to be its main growth driver in 2013, especially in the more mature markets. Axiata’s consolidations and market ‘rebalancing’ strategy in some OpCos countries (i.e. Cambodia) is expected to start bearing fruits in FY13. Meanwhile, we believe competitions are intensifying in both Robi (Bangladesh) and Dialog (Sri Lanka) while XL (Indonesia) may continue to face challenges due to the changing industry dynamics.

Forecast  No changes in our FY13-FY14 earnings forecasts.

Rating   Maintain MARKET PERFORM

Valuation  Maintaining our target price at RM6.86 based on an unchanged targeted FY13 EV/forward EBITDA of 8.7x (+2SD).

Risks  Regulation risks in its overseas ventures.

Source: Kenanga