AXIATA (FV RM5.80 - BUY) Corporate News Flash: Sizing Up XL Axiata

Stock Name: AXIATA
Company Name: AXIATA GROUP BERHAD

Research House: OSK

Price Call: BUY

Target Price: 5.80

THE BUZZ

While Etisalat's planned sale of its entire stake in XLAxiata (XL) is positive for XL's share liquidity, our checks reveal that Axiatais inclined towards raising its current 66.6% stake although management wouldhave to assess the potential regulatory issues from such a move and that itcould raise the ire of BAPEPAM. There are additional tax benefits for XLwith  an enhanced  stock liquidity, whichAxiata would also have to consider. We are keeping our BUY recommendation onAxiata, our top telecoms pick in Malaysia, based on SOP FV of RM5.80. 

OUR TAKE

Calling it quits. Etisalat's plan to dispose of its 13.3%stake in XL Axiata for USD600-700m (RM1.8-2.1bn) caught us by surprise, more sowhen media reports attributed the reason of the sale to a souring  relationship. We gather from Axiata that ithas had no issue with the management of Etisalat, which is represented by asingle board seat on XL, and which  hasbeen a silent partner since it bought into the telco in 2007 for USD438m.

The news  came on  the heels of  rumours that Qatar Telecom(QTel), another Middle Eastern telco, may also be disposing  of  its61% stake in Indonesia's No. 2 mobile operator, Indosat. At its recent 4QFY11results call, Indosat's management refuted speculation that QTel is exiting.Indonesia's biggest mobile operator, Telkomsel, was also mired in ashareholding tussle last year when its parent, Telkom, had wanted to buy outSingTel's 35% stake in the telco over policy disagreements.   

Axiata keen to up itsstake? From our checks, we gather that Axiata does not rule out thepossibility of taking up a portion of Etisalat's shares. However, the merits ofdoing so would have to be considered given that the group already has amajority stake and also full control over XL's board and policy matters. Someissues that need to be ironed out are: (i) additional returns on investmentsfrom funds that could otherwise be channeled for potentially lucrative M&Astargets in India and Indo-China, (ii) regulatory challenges in Indonesia, and(iii) XL's share liquidity. XL benefits from a further 5%  cut  inthe corporate tax rate of 25% should its current free float rise to 40% from20% (excluding the combined stakes of Axiata and Etisalat), which management islikely to consider.

Maintain BUY.Etisalat's sale of XL does not change our positive view on Axiata, which recently  gave  adividend surprise, and in our opinion could well surprise further on capitalmanagement in narrowing its dividend yield gap with its peers. We are keeping our BUY recommendation on AXIATA,based on a SOP FV of RM5.80. We continue to like the stock's  reasonable growth and  exposure to the more exciting mobile growth prospects overseas.

Source: OSK188