Axiata, Digi stop fall as value investors emerge

by SHAZNI ONG/ graphic by MZUKRI

AXIATA Group Bhd and Digi.Com Bhd rebounded slightly yesterday as investors saw value emerging post the heavy selling on Tuesday as analysts continue to have a favourable view of the benchmark index component companies.

Axiata’s shares rose nine sen or 2.19% higher to RM4.20, valuing the group at RM37.5 billion, while Digi’s closed one sen or 0.22% higher at RM4.61, valuing the Telenor SA controlled telco at RM35.8 billion.

Investors fled from Axiata and Digi on Tuesday after the proposed merger to create the country’s largest telecommunications company (telco) fell through last week, erasing RM9.2 billion in combined market capitalisation.

Axiata fell 77 sen or 15.8% lower on Tuesday, while Digi fell 5.9%.

AmInvestment Bank Bhd analyst Alex Goh, in a note yesterday, stated that the stock is undervalued and upgraded Axiata to a ‘Buy’ with an unchanged fair value (FV) of RM5.

“The current share price offers a 22% upside to our unchanged sum-of-parts (SOP)-based FV of RM5 per share which implies a forecasted financial year 2020 (FY20F) enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda) of 5.5 times — one standard deviation (SD) below its three-year average of 6.2 times.

“This also implies a 20% discount to SOP valuation of RM5.88 per share,” he said.

Goh added that Axiata currently trades at a bargain based on a forecasted FY19 EV/Ebitda of five times, compared to Maxis Bhd’s 12 times and a three-year average of 6.2 times.

News reports suggest Hong Kong-based CK Hutchison Holdings Ltd, backed by tycoon Victor Li, has made a preliminary approach to Axiata Group about a potential combination of their Indonesian telecommunications operations.

CK Hutchison has informally expressed interest in exploring a combination of its Indonesian wireless business with Axiata’s 66.5%-owned XL Axiata, which is currently the third-largest mobile operator with a mostly prepaid-dominated subscriber base of 55 million subscribers in Indonesia, after Telkomsel and Indosat.

XL Axiata, which registered a first half of 2019 profit turnaround to 291 billion rupiah from a previous loss of 49 billion rupiah, is supported by a strong service revenue growth of 15%, driven by ex-Java expansion.

Goh noted that Axiata has been introducing strategic investors to some of its businesses and advancing into new areas to revitalise growth. XL Axiata accounts for 11% of the group SOP valuation.

“We are not surprised by this development as the group is currently reprioritising its investments with long payback, as well as strategising and monetising existing investments form cash.

“Hence, there may be fresh interest in the listing of edotco Group Sdn Bhd in the medium term. Axiata aims to accelerate structural changes through industry consolidation and network sharing,” Goh added.

Affin Hwang Capital analyst Isaac Chow also upgraded Axiata to ‘Hold’ from ‘Sell’ with an unchanged target price (TP) of RM4.25, based on a 10% discount to its sum-of-total-parts valuation.

“We believe the steep decline in Axiata’s share price has largely priced in investors’ disappointment on the termination of the Axiata-Telenor merger discussion.

“Upside risks on Axiata are stronger than expected overseas earnings and the undertaking of value-accretive mergers and acquisitions.

“Downside risks are earnings disappointments and over-investment in business ventures with a long gestation period,” he said.

Chow noted investors are not looking to bargain hunt for Axiata shares for now while investors are not keen to sell at the current price level either.

“We sense their reluctance (to dispose of) is largely due to the sharp price decline, rather than confidence over Axiata’s earnings/business outlook.

“A few investors cited benchmarking or a lack of big-cap alternatives as to the reason to hold on to the stock. We sense investors may reduce their holdings on Axiata on any relief rally,” he said.

Without the merger, he expects Celcom Axiata Bhd’s business performance to continue to lag Maxis and Digi and hence, will be reflected in the lower valuation multiple for Axiata.

Chow said the disappointment on the merger abortion will likely overshadow operational improvements in Axiata’s Indonesia and Bangladesh businesses, and de-rate its share price.

Chow has maintained his ‘Hold’ call on Digi, with a TP of RM4.55 for the counter.

“Digi is trading near its five-year average of 25 times, looks fair. Digi’s attractive dividend yield of 4.1% should compensate for its lacklustre earnings growth. Key upside/downside risks to our call on Digi are stronger/weaker than expected profit growth,” the analyst said.