Notes

China Mobile's Stake in Axiata Unlikely to Happen

KUCHING: While China Mobile Ltd (China Mobile) has been reported to have held talks to buy circa 20 per cent stake in Axiata Group Bhd (Axiata) at an undiclosed price, analysts say this deal is unlikely to happen.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the stake would be valued at more than RM11.9 billion based on Wednesday’s closing price of RM6.95.

No agreement was reached as Axiata and its largest shareholder Khazanah Nasional Bhd (Khazanah) were unwilling to sell that much equity stake and also considered the indicated offer price as too low.

Although both China Mobile and Axiata have declined to comment on the news, the research arm believes the chances of the above-mentioned deal happening is slim given that there are no immediate synergies at this juncture.

“Meanwhile, we understand that Khazanah has been actively divesting its non-core assets recently but leave its core assets unchanged,” it added.

While the offer price tag remains vague, Kenanga Research suggested that Axiata could be worth between RM3.51-RM10.56 per share, based on the consensus FY15 earnings estimate and targeted multiples (on past 12-month telecom industry M&A valuation in the Asia-Pacific emerging markets) derived by using the market cap, earnings before interest, tax, depreciation and amortisation (EBITDA), net profit and book value valuation methodologies.

Analyst Lim Tee Yang of RHB Research Institute Sdn Bhd (RHB Research) believes this is more the case of China Mobile actively looking for M&A targets given its huge 420 billion yuan (US$68 billion) net cash position as at end-2013, rather than Khazanah actively seeking out suitors for its stake in Axiata.

“Note that only Khazanah has a sizeable stake (39 per cent) that fits China Mobile’s intentions. The other major stakeholders in Axiata are Employees Provident Fund (EPF) (13 per cent) and Permodalan Nasional Bhd (PNB) (10 per cent),” Lim observed.

The analyst finds it difficult to see any real incentive for Khazanah to pare down its stake in Axiata, especially since the latter is in the process of monetising its tower assets (which it thinks will most likely materialise in 2016 via a spinoff).

Based on an financial year 2015 (FY15) equity value/EBITDA (EV/EBITDA) basis, major tower companies can trade between 14 to 19-fold while Axiata is currently trading at eight-fold, RHB Research calculated.

“Therefore, we think the market has yet to fully price in the potential monetisation of Axiata’s tower asset,” Lim said.

Furthermore, the analyst believes Axiata does not need cash, unlike True Corp (True). It noted that in June, China Mobile acquired an 18 per cent stake in True via a rights issue to give True some funds to pare down its debts.

“Axiata’s gearing is relatively low, with net debt/EBITDA of 1.3-fold as at the first quarter of 2014 (1Q14),” it observed.

Overall, RHB Research maintained ‘neutral’ on Axiata with an unchanged sum of parts-based (SOP-based) fair value of RM6.85. Domestically, it opined that intensifying competition may put a lid on Celcom Axiata Bhd’s Celcom) growth.

“Axiata’s FY14 earnings growth outlook remains cloudy on XL Axiata’s earnings dilution following its acquisition of Axis. However, we expect to see a meaningful earnings recovery for Axiata in FY15,” Lim projected.