Maintain buy with target price (TP) of RM5.00
- Equity private placement deal. Axiata entered into an agreement with INCJ for a primary placement of edotco shares that would raise up to USD400m (equivalent to RM1,769.9m). Simultaneously, Axiata would divest edotco shares to Khazanah for a cash consideration of USD200m (equivalent to RM885m). INCJ is a Japanese public private investment co and its key interests in edotco are the unique portfolio in Asia's high growth frontier markets, solid customer contracts and management team. The capital injection should enable edotco to execute its growth strategies which include expansion within Asia through M&A exercises. Domestically, we believe there are also opportunities for edotco to grow its tenancy ratio as industry's cost escalates due to rising competition.
- Lower gearing. The secondary share offering of USD200m should help to lower Axiata's high gearing level from 2.2x to 2.0x (gross debt/EBITDA). As at 30 September 2016, Axiata has an unhedged USD loan of 53% or USD1.4bn. We estimate that USD debt accounts for about 50% of Axiata's total borrowing. We believe Axiata would eventually pare down some of its stakes in overseas operating units in order to raise funds to further reduce its high gearing ratio.
- Maintain Trading Buy. We are positive on this private placement exercise as it allows Axiata to unlock value of edotco via an initial public offering in the future. Additionally, Axiata's valuation looks attractive at 20.5x forward PER. However, we see potential headwinds for Axiata - political and regulatory risks in overseas markets, impairment in India and lower earnings due to disposal of high-growth subsidiaries. As such, we only rate Axiata a Trading Buy.