Affin Hwang Investment Bank Research said that in the long run, the merger should generate business synergy via its enlarged scale, savings on capex and procurements as well as cost optimizations.
To smooth out the merger, the two telcos have offered a set of undertakings to ensure effective competition in the sector, the research house noted.
These include spectrum divestment of various bands by the merged entity, with the first band to be returned within 24 months of the merger and the second and third bands within 36 months.
Apart from that a separate independent business unit for mobile virtual network operator wholesale business will be established within six months after the deal is closed.
Other undertakings include the divestment of the “Yoodo” brand via sales auction within 18 months, removal of exclusive arrangements with exclusive distributors in Sabah, Labuan, Sarawak, Terengganu, Pahang and Kelantan within three years and positioning the two telco’s prepaid and postpaid services under a single brand within two years.
The research house said that in June 2021, Axiata estimated that the deal would have a value accretion of RM8 billion on a net present value basis from cost and capex synergies.
Nonetheless, it pointed out the group has yet to provide granularity on the estimates and how the recent development – most notably the deployment of 5G via Digital Nasional Bhd – may affect the value accretion. All in, expenditure savings during the early years is expected to be relatively small.
Of the two, Affin Research sees Digi as a direct beneficiary of the merger as it will get a direct exposure to the RM44.7 billion merge entity, which will be among the 10 largest companies on Bursa Malaysia by market capitalisation.
“Post-merger, the shareholders of Digi should benefit from opex-capex synergies, valuation re-rating and higher share liquidity while continuing to enjoy consistent dividend payment from Celcom-Digi,” it said.
As for Axiata, the move is expected to be earnings dilutive to its shareholders. Post-merger, Celcom’s profit and loss will be de-consolidated and Axiata will classify Celcom-Digi as an associate, which would dilute its 2023-24E earnings per share by 13% to 14%.
The research house has also expressed caution on Axiata’s 2022-23E earnings outlook due to regulatory risks in several markets, rising interest rates and uncertainties in regional economic growth.
“We believe these global macro headwinds will have larger impacts on the frontier markets that Axiata operates in, vis-à-vis Malaysia. Although these negative (conditions) are partly priced-in, we do not expect Axiata to attract investor interest during the flight to safety, given its relatively volatile earnings profile (versus the domestic telcos) and lower dividend yield,” it said.
For exposure to the merger, it recommends investors put in their money directly through Digi.
Affin Research has maintained its “buy” call on Digi (price target: RM3.80) and a “hold” call on Axiata (PT: RM3.40).
Affin Hwang values the merged company at RM44.7 billion based on 9.5x 2023E enterprise value over earnings before interest, taxes, depreciation, and amortization although it has yet to incorporate any financial impact from the proposed merger.
It said the key risks to Digi are the termination of the proposed merger, negative updates from Malaysia’s 5G plan, and weaker-than-expected earnings due to higher competition and lower average revenue per user.
While, the upside risks to the research house’s “hold” rating on Axiata are strong earnings and positive updates form Malaysia’s 5G plan; downside risks include negative updates from the 5G plan, earnings disappointments and negative regulatory surprises from its overseas operations.