Friday, December 16, 2011

Axiata Berhad: Fruitful Dialog with Suntel

16 December 2011
Price Target: RM4.92
Share Price: RM4.90


News
# In its filing to Bursa Malaysia, Axiata announced that Dialog has entered into a Share Purchase Agreement (SPA) to acquire 100% of the ordinary shares of Suntel Ltd from its current shareholders.

# The acquisition price tag is in the range of USD33.9m and USD34.9m, corresponding to a valuation multiple of 3.0x to 3.1x of the EBITDA of Suntel for financial year ended 31 December 2010. This purchase will be financed via internal generated funds.

# The SPA stipulates the fulfillment of the conditions precedent within a maximum period of 6 months from the date of the SPA.

# Suntel is the second largest fixed telco in Sri Lanka with 382 base stations offering fixed voice solutions, data solutions, data center and managed services.

Financial impact
Although the acquisition cost is perceived to be relatively cheap comparing to Axiata’s EV/EBITDA of 5.7x for FY11, Suntel’s contribution to the bottom line is not expected to be very positive assuming high gearing and hefty depreciation cost as a result of CAPEX intensive nature of the telecommunication business.

Comments
# However, we view this positively as this acquisition will allow Dialog expand its market share especially in the corporate and SME segments. The firm said that the merged entity will have 23% of the fixed access market share.

# The merger would allow Dialog to enjoy greater cost savings and efficiency through economy of scale and scope. This can be achieved by consolidating radio sites, sharing transmissions / backhaul, data centers, marketing (crossselling) and rationalizing distribution network.

# We have cross checked with Axiata that Dialog does not need to surrender Suntel’s spectrum licenses to the government after the acquisition.

Catalysts
- Higher smartphone penetration boosting data ARPU.
- Strong growth in low penetration developing markets.
- More cost savings from collaboration with DiGi.

Risks
Regulatory risks, FOREX fluctuations & competitive risks.

Forecasts
Unchanged.

Rating: HOLD, Target Price: RM4.92
Positives
Despite the challenging 3Q11, Axiata’s main businesses (Celcom, XL, Dialog) continue to execute well.


Negatives
Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation
We reiterate our HOLD call with unchanged target price of RM4.92. We opine that the robust growth story may have come to an end especially for Celcom and XL who are the
main contributors as market matures and competition intensifies.



Source: HLIB Research

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