Axiata’s M1 divestment is timely, say analysts

By MARK RAO / Pic By TMR

Telecommunications company (telco) analysts are positive on Axiata Group Bhd’s RM1.65 billion stake sale in M1 Ltd, as the proceeds can fund future expenditure and strengthen its cash position despite immediate loss in revenue.

The divestment enables the telco to exit the investment at a profit and provide timely capital for future investments, said Affin Hwang Investment Bank Bhd analyst Isaac Chow.

“The deal is largely consistent with the management’s strategic directions and is broadly within our expectations,” he said in a research report yesterday.

Affin Hwang also maintained its ‘Hold’ rating on Axiata with an unchanged target price of RM3.63 based on a 25% discount to its sum-of-parts (SOP) valuation.

Chow noted that operationally, Axiata’s key subsidiaries are expected to record further revenue gains — but stiff competition, coupled with rising cost pressures, could cap earnings growth and weigh on investors’ sentiment.

Axiata announced last week that it accepted Konnectivity Pte Ltd’s RM1.65 billion bid for its 28.7% interest in Singapore-based M1, based on a consideration of S$2.06 (RM6.20) per M1 share.

The telco accepted the offer via its wholly owned unit Axiata Investments (Singapore) Ltd and is expected to recognise a RM126.5 million gain from the sale.

Axiata identified its stake in M1 as a non-strategic investment, as the firm looks to avoid being a minority investor in a potentially privatised company which would make the investment illiquid.

The proceeds from the divestment will be utilised by Axiata for new investments including modernising the group’s information technology and network infrastructure, digitisation of operations and expanding into new growth areas.

M1 had contributed to Axiata’s growth steadily since the latter’s investment back in 2005 with dividends amounting to RM1.1 billion in the last 10 years.

JF Apex Securities Bhd senior analyst Lee Cherng Wee said the disposal will also pare down Axiata’s debt, while raising cash for operational expenditure.

“The divestment will increase Axiata’s cash reserve to RM7.66 billion and lower its net debt to earnings before interest, taxes and amortisation level to 1.4 times from 1.61 times currently,” he said in a report.

However, he said the research firm lowered Axiata’s net profit forecast for 2019 and 2020 fiscal years by 6% and 5.6% respectively, owing to the loss of contribution from M1.

On another development, Lee said there is no further clarity provided on reports that the Nepali Supreme Court has ordered Ncell Pte Ltd, in which Axiata is the major shareholder, to pay RM2.16 billion in capital gain taxes.

Axiata said it has not received any official order from the court with regard to the taxes to be paid by its Nepal-based mobile network operator Ncell.

Lee said JF Apex’s target price for Axiata remains unchanged at RM4.95 pending clarity from the Ncell legal issue, but could be lowered to RM4.66 if Axiata is forced to foot the bill. The research house currently has a ‘Buy’ coverage on Axiata.

Meanwhile, Public Investment Bank Bhd estimates that the capital gain taxes could effectively amount to between RM1.4 billion and RM1.6 billion if Axiata is made to pay for the taxes via court order.

The firm has a RM3.85 target price for Axiata, but the SOP valuation for the telco will be reduced by 3.9% once its stake in M1 is sold.