We maintain our forecasts for now and BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts (SOP)-based fair value of RM6.45/share, which implies a FY16F EV/EBITDA of 7x –

We maintain our forecasts for now and BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts (SOP)-based fair value of RM6.45/share, which implies a FY16F EV/EBITDA of 7x – half of  Singapore Telecommunications Ltd’s present 14x. Bangladesh’s High Court approved the merger of Axiata’s 92%-owned Robi with Airtel on the condition of a payment of a merger fee of Tk100 crore (RM52mil) plus Tk33.8 crore (RM17.6mil) per MHz of Airtel's 2G spectrums to be used by Robi for the next 4 years. Instalment options may be referred to the Bangladesh Telecommunication Regulatory Commission.

Recall that the merged entity will have an enlarged 40MHz spectrum allocation, up from Robi’s 20MHz currently. AirTel’s spectrums in the 900MHz, 1800MHz and 2100MHz are contiguous to Robi’s current allocations, which enable the group to improve its network quality and data experience. After completion of the merger, Axiata will have a 69% stake in the merged entity, Bharti 25% and NTT 6%.The merger will lead to a more sustainable business model for the highly competitive Bangladeshi cellular sector, as the merged entity will emerge with a subscriber market share of 29% and revenue share of 30%. The group will emerge as the largest mobile operator in the Chittagong-Comilla regions, and the second largest in Dhaka.

Robi currently has 28.4 million subscribers and is the market leader in Chittagong and Comilla regions while Airtel Bangladesh has 9.7 million subscribers with a strong market position in Dhaka and the youth segment. Rival Grameen Phone Ltd has 51.5 million subscribers while third-placed Banglalink has 31 million. In 2QFY16, Axiata’s 92%-owned Robi in Bangladesh registered a 4% EBITDA decline on a flat revenue amid regulatory requirements for bio-metric registrations starting in December last year. AirTel, which registered a net loss of RM455 mil for FY ended 31 March 2015, is only expected to become PATAMI accretive from 2018 from the merger synergies. EBITDA-wise, AirTel will have a slightly negative impact for Axiata in the medium term.

Hence, while this proposed merger will strengthen Axiata’s competitive position in the longer term in Bangladesh, we remain neutral on this development as the group will need to navigate the near-term dilutive impact of AirTel’s losses combined with the additional amortisation of merger fees over the next 2 years. Axiata currently trades at a bargain FY17F EV/EBITDA of 6x, below its 2-year average of 8.6x. Additionally, dividend yields are attractive at 3.8%.