Axiata Group - Managing an overworked balance sheet HOLD, 2 Oct 2014

We maintain our HOLD call on Axiata with an unchanged fair value of RM6.80/share.  XL (66%-owned Indonesian unit) has finalised the sale of 3,500 tower assets to PT Solusi Tunas Pratama for a cash consideration of IDR5.6tril (RM1.5bil). Concurrently, XL also entered into a master tower lease agreement with STP to lease back the 3,500 towers for 10 years at a flat monthly rental of IDR10mil/month. Positives from the deal: (1) value unlocking; (2) frees up capital to deleverage a stretched balance sheet; (3) preferential lease rates for a large portfolio of towers with no O&M and escalators for 10 years. However, some dilution to EBITDA margin in the near-term (~200bps in FY15F) is expected given the incremental lease cost, but this is partly offset by lower depreciation at the EBIT level. The tower sale was concluded at 9x EV/EBITDA (according to management). This is at the typical premium to telco operators’ valuation (XL trades at 8x FY15F EV/EBITDA) but at a discount to telco tower companies which trade at 15x-16x EV/EBITDA. The reduced net debt at XL is positive on our DCF-based valuation for XL. However, net impact to our SOP valuation is minimal given incremental cost from tower leases. Net debt-to-EBITDA of 2.5x post tower sale is still on the high side, and we think XL could be looking for ways to further deleverage, but no timeline has been identified at this juncture. As such, we think XL is still in no position to surprise on dividend payout, despite this deal and possible further asset rationalisation in the near term.

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