Axiata Group Bhd - Bleak Near-Term Outlook for XL Axiata-Smartfren Merger
Thu, 20-Mar-2025 07:34 am
by Steven Chong • Apex Research

Counter

AXIATA (6888)

Target Price (RM)

2.100

Recommendation

Buy

Summary

  • Near-term earnings could be affected by (i) elevated integration costs from the merger, (ii) the deconsolidation of XL Axiata, and (iii) the recognition of Smartfren's losses.

  • Axiata will undergo a two-year gestation phase, during which the majority of integration costs will be absorbed prior to realising synergies.

  • Maintain BUY recommendation with an unchanged target price of RM2.10, based on DCF valuation (WACC of 6.8% with a long-term growth rate of 0.5%).

 

Key update on the merger between XL Axiata and Smartfren. The Group intend to utilise USD475m cash consideration from Sinar Mas to deleverage, significantly improving its gearing ratio from 1.24x to 0.74x which translates in to annual pre-tax savings of c.RM170m.  That said, management acknowledges potential near-term pressure on PATAMI due to the deconsolidation of XL Axiata and integration-related costs, with Axiata’s FY24 pro forma PATAMI sliding from RM947m to RM627m after factoring in these challenges. The merger is currently awaiting final approval from the Indonesian government and the impact of the merger is set to take effect latest by 2QFY25.

 

Our Take. While Axiata has maintained its FY25 guidance, we retain our cautious view as near-term earnings could be affected by (i) elevated integration costs from the merger, (ii) the deconsolidation of XL Axiata, and (iii) the recognition of Smartfren's losses. We note that the Group will undergo a two-year gestation phase, during which the majority of integration costs will be absorbed. Post-integration, Axiata is expected to start realising pre-tax synergies with a run rate of USD300-400m p.a. 

 

Earnings revision. We kept our earnings forecasts unchanged for now, awaiting further clarity along with regulatory and shareholder approvals. The new management team of the merged entity is still finalising merger-related expenses and is expected to provide more concrete guidance at a later date.

 

Valuation. Maintained our BUY recommendation on Axiata with unchanged target price of RM2.10, based on DCF valuation (WACC of 6.8% 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.

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