Introduction

The telecom industry in Indonesia is witnessing a significant transformation with the proposed merger between XL Axiata (EXCL) and Smartfren Telecom (FREN). This comprehensive report by UOB Kay Hian provides a detailed analysis of the merger’s implications on the industry and the financial forecasts for XL Axiata. Here, we delve deep into the specifics of the merger, potential synergies, and financial projections to provide a clear picture of the anticipated market shifts.

Company Overview: XL Axiata

XL Axiata is a key player in the telecommunications sector, primarily offering cellular and mobile internet services. The company’s stock performance has seen its ups and downs, with a 52-week high of Rp2,650 and a low of Rp1,885. Major shareholder Axiata Investments holds a 66.3% stake in the company.

Merger Announcement: EXCL and FREN

XL Axiata and Smartfren Telecom have agreed to merge, combining their resources to create a pre-synergy enterprise valued at Rp104 trillion (approximately US\$6.5 billion). This merger is expected to support a healthier data pricing environment in the long term, a common outcome following telecom industry consolidations. Despite FREN’s recent performance issues, including a 9M24 loss, the market has already factored in these challenges, as seen in EXCL’s share price adjustments following the merger announcement.

Projected Benefits of the Merger

The merger is expected to result in a 61% increase in EXCL’s subscriber base, bringing it closer to the second-largest market player, Indosat (ISAT). Post-merger, the new entity, XLSmart, is anticipated to have around 94.5 million subscribers, slightly trailing ISAT by 4%.

Significant cost synergies, estimated between US\$300 million and US\$400 million, are expected from network optimization and expansion, vendor negotiations, channel optimization, and digital channel acceleration. The integration aims to decommission 20-30% of overlapped sites, contributing to these synergies.

Short-term Impact and Market Response

In the near term, the merger is anticipated to have limited impact on EXCL’s share price, which only saw a modest 3% increase following the transaction announcement. However, the potential negative sentiment from FREN’s financial performance seems to be already reflected in EXCL’s share price movements.

Financial Forecasts and Valuation

The financial outlook for XL Axiata indicates steady growth, with net turnover projected to increase from Rp32,323 billion in 2023 to Rp38,878 billion by 2026. EBITDA is expected to rise accordingly, enhancing the company’s profitability margins. The merger is anticipated to bolster EXCL’s market position, with a target share price set at Rp3,200, reflecting an EV/EBITDA valuation of 4.8x.

Strategic Implications of the Merger

The merger transaction involves EXCL issuing new shares to FREN’s shareholders, with Sinar Mas acquiring a significant stake in the new entity, XLSmart. Both Axiata and Sinar Mas will hold equal stakes, maintaining joint control over the strategic direction of XLSmart. The partnership leverages Axiata’s regional expertise and Sinar Mas’ local market knowledge, promising a robust competitive edge.

Earnings and Risk Assessment

No revisions have been made to the earnings forecast. Potential risks include intensified competition, adverse macroeconomic conditions, increased operational costs, and regulatory changes. However, the merger’s strategic benefits are expected to offset these risks, supporting positive long-term growth.

Conclusion

UOB Kay Hian maintains a BUY recommendation for XL Axiata, underscoring the merger’s strategic advantages and potential to enhance shareholder value. The combined expertise of Axiata and Sinar Mas is poised to drive XLSmart towards a promising future in Indonesia’s dynamic telecom landscape.