Axiata’s Indonesian ops merger with Smartfren prompts downgrade call

KUCHING: The potential merger between Axiata Group Bhd’s (Axiata) Indonesian telco PT XL Axiata Tbk (Axiata XL) and Indonesia telco PT Smartfren Telecom Tbk (Smartfren) has prompted analysts at MIDF Amanah Investment Bank Bhd (MIDF Research) to downgrade its previous ‘Neutral’ call on Axiata to ‘Trading Sell’ due to concerns of affected earnings profitability post-merger.

To recap, in a report from Reuters on May 8, it was reported that Indonesia’s telecommunication minister had revealed that Axiata and Indonesian group PT Sinar Mas, the owner of Smartfren, have sought permission from the Indonesian government to merge their telco units.

In a corporate update report, the research arm guided that it is not surprised by the development as Axiata and PT Sinar Mas have been in discussion on a possible merger since 2021.

The merger is expected to increase Axiata XL’s subscriber base from its current 58 million subscribers to 94 million.

While this is a significant increase, MIDF Research said that Axiata XL will continue to remain the third largest telco in Indonesia as the injection of Smartfren’s 36 million subscribers is still not sufficient to dethrone the top two telcos, Telkomsel with 153 million subscribers and Indosat with 100 million subscribers.

Nevertheless, post-merger, Axiata XL’s position as the third largest telcos in Indonesia will be solidified.

Despite this,the research firm is still concerned over the merger as it believed Smartfren will negatively impact Axiata XL’s profitability.

“While Axiata XL has been profit making, we gather than Smartfren has been loss making. Referring to Smarfren’s 2023 annual report, the group suffered a net loss of RM32.2 million.

“This would potentially affect Axiata XL’s profitability, especially in the near-term,” the research arm explained.

Moreover, with Axiata XL’s recent concluded acquisition of Link Net in 2022, the research arm reckons that the merger with Smartfren would create even more pressure for management to improve the profitability of Axiata XL.