Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD
Axiata Group
(Oct 11, RM4.80)
Maintain buy with unchanged target price of RM5.85: India's minister of telecommunications Kapil Sibal unveiled a new draft telecom policy yesterday that includes proposals to make roaming free, introduce a pan-India permit that will enable telcos to offer all communication services, allow operators to share and trade spectrum and facilitate consolidation in the sector. The draft policy also allows the government to audit the use of spectrum periodically for efficient use. We understand Indian telcos currently hold 22 separate mobile permits as the country is split into this many zones.
The details of the proposals were not disclosed but the new rules will be finalised by Dec 2011. The last comprehensive telecom policy was announced in 1999 and since then the sector has witnessed explosive growth. More importantly, it was marred by one of the country's biggest corruption scandals.
While details of the new draft policy are still sketchy, we understand that Indian telcos such as Axiata Bhd associate Idea Cellular (Idea), Barti Airtel and Reliance Communication will be negatively impacted by the removal of the inter-India roaming fees. It is estimated that roaming charges contribute to 10% of the operators' total revenue. However, we take a positive view on the consolidation in the sector the policy will facilitate as currently there are approximately 15 telco players in India. The consolidation could lead to stabilisation of rates affected by fierce competition.
We feel there will be no direct impact on Axiata's operations and earnings before interest, tax, depreciation and amortisation (Ebitda) but the policy will have an impact on its earnings due to Idea's position as an associate of Axiata.
Consensus expects the removal of roaming charges may have a 5% to 6% impact on the margins of leading telecom operators. However, all associates (not just Idea but M1 and Hello as well) contributed about 6% to Axiata's 1H11 earnings. Hence, we believe the impact on earnings will be minimal.
We believe a possible positive impact will be on Axiata's year-end impairment test. To recap, in FY10, Axiata recorded an impairment of RM1.08 billion for its investment in Idea due to the intense competition in India, causing it to register a lower-than-expected net profit of RM2.1 billion. Discounting the impairment, FY10 net profit was estimated to be RM2.9 billion. The stabilisation of rates stemming from consolidation might lessen any future impairment or even provide a possible writeback.
While we believe consolidation in India's telecom industry will be positive for Axiata, the impact will not be in the near term given that the policy is only at the draft stage. We maintain our FY11 and FY12 forecasts therefore. We retain our expectations that Axiata's dual growth source will be data (for Celcom and XL) and the continuing growth in Bangladesh and Sri Lanka. We maintain our 'buy' recommendation for Axiata with a target price of RM5.85. Our valuation is based on 6.5 times earned value/Ebitda, which is the average of its regional peers. ' MIDF Research, Oct 11
This article appeared in The Edge Financial Daily, Ocotber 12, 2011.
Company Name: AXIATA GROUP BERHAD
| Research House: MIDF | Price Call: BUY | Target Price: 5.85 |
Axiata Group
(Oct 11, RM4.80)
Maintain buy with unchanged target price of RM5.85: India's minister of telecommunications Kapil Sibal unveiled a new draft telecom policy yesterday that includes proposals to make roaming free, introduce a pan-India permit that will enable telcos to offer all communication services, allow operators to share and trade spectrum and facilitate consolidation in the sector. The draft policy also allows the government to audit the use of spectrum periodically for efficient use. We understand Indian telcos currently hold 22 separate mobile permits as the country is split into this many zones.
The details of the proposals were not disclosed but the new rules will be finalised by Dec 2011. The last comprehensive telecom policy was announced in 1999 and since then the sector has witnessed explosive growth. More importantly, it was marred by one of the country's biggest corruption scandals.
While details of the new draft policy are still sketchy, we understand that Indian telcos such as Axiata Bhd associate Idea Cellular (Idea), Barti Airtel and Reliance Communication will be negatively impacted by the removal of the inter-India roaming fees. It is estimated that roaming charges contribute to 10% of the operators' total revenue. However, we take a positive view on the consolidation in the sector the policy will facilitate as currently there are approximately 15 telco players in India. The consolidation could lead to stabilisation of rates affected by fierce competition.
We feel there will be no direct impact on Axiata's operations and earnings before interest, tax, depreciation and amortisation (Ebitda) but the policy will have an impact on its earnings due to Idea's position as an associate of Axiata.
Consensus expects the removal of roaming charges may have a 5% to 6% impact on the margins of leading telecom operators. However, all associates (not just Idea but M1 and Hello as well) contributed about 6% to Axiata's 1H11 earnings. Hence, we believe the impact on earnings will be minimal.
We believe a possible positive impact will be on Axiata's year-end impairment test. To recap, in FY10, Axiata recorded an impairment of RM1.08 billion for its investment in Idea due to the intense competition in India, causing it to register a lower-than-expected net profit of RM2.1 billion. Discounting the impairment, FY10 net profit was estimated to be RM2.9 billion. The stabilisation of rates stemming from consolidation might lessen any future impairment or even provide a possible writeback.
While we believe consolidation in India's telecom industry will be positive for Axiata, the impact will not be in the near term given that the policy is only at the draft stage. We maintain our FY11 and FY12 forecasts therefore. We retain our expectations that Axiata's dual growth source will be data (for Celcom and XL) and the continuing growth in Bangladesh and Sri Lanka. We maintain our 'buy' recommendation for Axiata with a target price of RM5.85. Our valuation is based on 6.5 times earned value/Ebitda, which is the average of its regional peers. ' MIDF Research, Oct 11
This article appeared in The Edge Financial Daily, Ocotber 12, 2011.
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