Introduction to Axiata Group Berhad

Axiata Group Berhad, a prominent mobile operator, is currently under the spotlight due to an ambitious merger proposal involving its Indonesian entities. The company’s stock is performing around RM2.37, with a target price of RM2.90, indicating a potential upside of 22.4%. The Group operates within the Communication Services sector and is listed under the Bloomberg ticker AXIATA MK. The market capitalization stands at RM21,763.2 million, approximately US\$4,916.9 million.

Merger of XL Axiata and Smartfren

The proposed merger of XL Axiata and Smartfren in Indonesia is a significant move for Axiata, aiming to consolidate its market position within the region. This merger is poised to create an entity with an enterprise value of US\$6.5 billion, calculated at 4.6 times EV/EBITDA. Post-merger, Axiata will hold 34.8% of the new entity, receiving US\$475 million in cash to balance its shareholding with Sinar Mas, Smartfren’s shareholder.

Despite minimal immediate earnings impact, the merger is expected to result in annual cost savings between US\$300 million and US\$400 million, enhancing long-term profitability. The transaction is set for completion by the first half of 2025, with XL Axiata issuing 5.07 billion shares at Rp2,350 per share to acquire Smartfren and SmartTel.

Financial Implications and Projections

The merger is anticipated to increase Axiata’s stake value from US\$1.2 billion to US\$1.4 billion, offering value accretion of approximately US\$0.2 billion. The cash inflow will allow Axiata to reduce its net debt/EBITDA ratio from 2.6x to 2.5x post-merger. The financial outlook for the coming years shows a steady growth in net turnover and EBITDA, with a slight increase in net profit margins from 2.7% in 2024 to 3.1% by 2026.

Strategic Market Positioning

The merger positions XLSmart as Indonesia’s third-largest telecommunications player, with a projected 27% market share of subscribers. This strategic consolidation is expected to streamline operations and enhance economies of scale, reflected in a projected revenue and EBITDA boost of 34% and 29% respectively. The combined entity will manage 67,000 sites, optimizing network coverage and quality.

Environmental, Social, and Governance (ESG) Initiatives

Axiata is committed to reducing its operational carbon emissions by 45% from the 2020 baseline and achieving net-zero emissions by 2050. The Group is also focused on social initiatives, such as increasing female representation in senior management to 30% by 2025. In terms of governance, Axiata ensures high standards with over 90% completion in annual training for Anti-Bribery, Anti-Corruption, and Cyber Security.

Conclusion and Recommendation

With the merger poised to strengthen Axiata’s market presence and operational efficiencies, the company’s future appears promising. UOB Kay Hian maintains a ‘BUY’ recommendation for Axiata, with a target price of RM2.90. Key catalysts for a potential re-rating include improved performance from operational companies, a favorable interest rate environment, and strategic listings such as edotco.