Axiata Group Bhd - XL Axiata and Smartfren officially confirms their merger
Thu, 12-Dec-2024 07:47 am
by Steven Chong • Apex Research

Counter

AXIATA (6888)

Target Price (RM)

2.60

Recommendation

Buy

Summary

  • XL Axiata and Smartfren has reached an agreement to merge as a new entity, XLSmart with a purchase consideration of RM3.3bn.

  • We deemed the acquisition valuation at RM3.3bn, which translates to 5.1x EV/EBITDA to be slightly overpriced.

  • We maintain BUY recommendation on Axiata with unchanged TP of RM2.60, based on DCF valuation and three-star ESG rating as the transaction is still pending approval from the authorities and shareholders.

 

  • A definitive agreement has been reached for the merger between XL Axiata and Smartfren. Both companies have reached an agreement to merge and form a combined entity, XLSmart. As part of the merger, XL Axiata will issue 5.1bn new shares at a price of IDR2,350 (65 sen) per share to acquire Smartfren and its subsidiary, PT Smart Telcom (SmartTel), for a total purchase price of IDR 11.9tn (RM3.3bn). This brings Axiata shareholdings in XLSmart to 47.9% after the issuance.

     

  • To establish joint control for Axiata and Sinar Mas (Smartfren major shareholder), Axiata will be selling 2.4bn (13.1% stake) shares in XLSmart to Sinar Mas, for a cash consideration of USD475m (RM2.1bn). The first USD400m cash consideration will be issued upon completion of the proposed merger, whereas the remaining USD75m is subject to certain conditions.

     

  • Post-merger, Axiata Group and Sinar Mas Group will become joint controlling shareholders, each owning a 34.8% stake in XLSmart, giving them equal influence over its strategic direction and decisions. The transaction is expected to be finalised in 1HFY25, pending regulatory and shareholder approvals. 

     

  • Potential synergy to Axiata. XLSmart will have a combined mobile subscriber base of around 94.5m and a market share of 27% in Indonesia. We expect the merger to be earnings accretive over the long run stem from i) cost saving synergies of RM1.2bn-1.7bn annually, ii) market consolidation to steer ARPU growth, iii) enlarged customer base from larger combined spectrum and addition from Smartfren mobile subscribers.

     

  • Acquisition details. The acquisition valuation of RM3.3bn, which translates to 5.1x EV/EBITDA which is slightly expensive. In comparison to the closest peers, Telkom Indonesia and Indosat, are trading at EV/EBITDA multiples of 4.7x and 4.9x, respectively. We believe the slight premium to the valuation is unjustified given Smartfren's smaller presence in the Indonesian market, coupled with long standing disappointing results and its inability to achieve profitability. Post-completion of acquisition, we gathered that Axiata’s net gearing is expected to drop from 1.21x to 0.77x as most of the cash consideration will be utlilised to pare down debt.

     

  • Our take. In a nutshell, we opined there will be earnings dilution in the near term given that Axiata’s share of profit is likely to fall following the issuance of new share capital, while the initial gestation phase to optimize Smartfren's operations will result in limited cost savings.

     

  • Valuation & Recommendation. Given that the transaction is still pending approval from the authority and shareholders, we made no changes to our earnings forecast at the moment. Maintained our BUY recommendation on Axiata with a target price of RM2.60, based on DCF valuation (WACC of 7.3% with a long-term growth rate of 0.5%).

     

  • Risk. Axiata continues to face geopolitical, macroeconomic and regulatory risks as well as strengthening USD and high interest rates.

Read more details in:

Disclaimer

The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report.

Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against Apex Securities Berhad. Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of Apex Securities Berhad.

Market Mover
Settlement Rates
Currency Buy Rates (RM) Sell Rates (RM)
USD 4.390206 4.425718
EUR 5.008717 5.015095
CNY 0.603029 0.603828
HKD 0.565660 0.569770
SGD 3.345779 3.370205