XL Axiata profitability will be a concern.
MIDF Research, in a note today (May 9) said they are downgrading their recommendation for Axiata to TRADING SELL from neutral previously with an unchanged target price of RM2.42.
This is following the news on a potential merger between XL Axiata and Smartfren. While the transaction may strengthen XL Axiata’s subscriber market share, MIDF’s immediate concern will be on Smartfren’s loss-making position. Also, should the funding involve cash, it would further burden the group’s balance sheet.
One step closer to merger. According to newswire, Axiata Group and PT Sinar Mas have sought permission from the Indonesian Government to merge their telco units. Previously, Bloomberg had reported the planned merger will create USD3.5b or RM16.6b entity.
MIDF is not entirely surprised by the development. We gather that Axiata and PT Sinar Mas has been in discussion on the merger since 2021.
Solidifying its No.3 position in Indonesia. At present, XL Axiata is the third largest telcos in Indonesia with 58m subscribers. Meanwhile, Smartfren’s subscribers stand at about 36m subscribers. Should the merger take place, XL Axiata subscriber base will increase to 94m. Nonetheless, this would be insufficient to dethrone the top two telcos in the country namely Telkomsel (subs: 153m) and Indosat (subs: 100m).
Profitability for XL Axiata will be a concern. While XL Axiata has been profit making, MIDF gathers that Smartfren has been loss making. Referring to Smartfren’s 2023 annual report, the group suffered a net loss of -IDR108.9b (-RM32.2m). This would potentially affect XL Axiata’s profitability, especially in the near term.
On another note, Axiata concluded its acquisition of Link Net in 2022. Thus, MIDF’s view is that the anticipated merger with Smartfren would create more pressure for the management to improve the profitability of XL Axiata.
MIDF is keeping their earnings estimates unchanged at this juncture pending the announcement on the transaction.
Merger effort on Sri Lanka on-going. This anticipated transaction is like that of Dialog Axiata. To recall, Axiata is under another merger exercise i.e. with Bharti Airtel. MIDF said these two transactions may create earnings volatility for the group in the near term. Thus, MIDF does not favour the potential earnings uncertainty for Axiata group, which may lead to a lower dividend payout.
Funding via share swap? Taking cue from the recent announcement of the merger of Dialog Axiata and Bharti Airtel, MIDF does not discount the possibility that the funding of the transaction will be done via share swap, their view is primarily premised on the group’s huge borrowings of RM24.8b as at 4Q2023. Should this happen, this transaction may also dilute Axiata group’s current stake (66%) in XL Axiata.
