Plenty of doubt surrounding potential TM-Axiata merger

KUCHING: Telekom Malaysia Bhd ( TM) and Axiata Group Bhd (Axiata) potentially merging is a development which analysts say “raises more doubts than confidence.”

This comes as news reports said TM and Axiata could potentially merge as both companies have already hired advisors, with CIMB Investment Bank advising TM while Goldman Sachs is working for Axiata on the deal.

The team at Kenanga Investment Bank Bhd ( Kenanga Research) noted that Khazanah National Bhd is the largest shareholder of both companies. It owns 26.2 per cent of TM and 37.6 per cent of Axiata.

“While finding synergies would not be too complicated -- in view of both companies used to operate under the same roof prior to the demerger and controlled by the same major shareholder -- we are doubtful that the synergies could be material enough to create further value to shareholders,” the research arm said in a sector update.

In Kenanga Research’s view, this could raise plenty of questions such as why the original demerger happened.

Also, as both companies are not in the distress financial situation currently, why should they initiate a major ownership or operational change?

The research arm also asked why grant an approval for TM to purchase wireless mobile operator P1 from Green Packet Bhd and subsequently allocate more than RM1 billion capital expenditure (capex) plan?

Kenanga Research was unsure the above speculation will involve the Axiata Group or merely the merger of Axiata’s Celcom Axiata Bhd (Celcom) with TM.

In the research arm’s view, should the latter scenario materialise, the business direction of both companies could be somehow uncertain.

“In view of the sizeable Celcom contribution, the enlarged entity could potentially lead TM to reposition its direction away from a ‘convergence champion’ where the primary focus is on its broadband while the mobile segment is merely playing a supplement role under the convergence path,” Kenanga Research said.

From Axiata’s perspective, without Celcom’s contribution, Axiata could potentially be facing severe challenging time ahead judging from the sizeable contribution.

Kenanga Research went on to highlight that according to Bloomberg, the median target companies’ EBITDA multiplies of cellular companies in the Asia Pacific Emerging market over the past five-year is 10.4-fold, suggesting that Celcom’s enterprise value could potentially be valued at RM24 billion.

It further highlighted that the estimation, however, is below Maxis Bhd ( Maxis) and Digi.Com Bhd’s (Digi) equity value (EV)/EBITDA, and suggests rooms for valuation expansion.

In view of the potential hefty valuation ahead, the research arm believed the merger – if any – is likely to involve share swap mechanism rather than cash outlay.

“Having said that, the deal could be dilutive to TM’s shareholders considering its market capitalisation is merely half of Axiata ( RM22.3 billion versus RM42.3 billion),” the research arm noted.

With that, Kenanga Research has revised all its big- cap telecom target prices where the research arm continued to peg an ‘outperform’ call to TM but with a higher target price of RM7.03 per share.

Digi and Maxis’ ratings were maintained by the research arm at ‘ market perform’ but with a higher target price of RM4.98 per share and RM6.20 per share, respectively.

The research arm noted that Axiata’s target price, meanwhile, has moved up to RM4.64 per share.