KUALA LUMPUR: Affin Hwang Capital is slightly negative on Axiata Group Bhd's unit edotco Group Sdn Bhd proposed acquisition of Philippines towers for RM3.42 billion.
Affin Hwang said Axiata management had long guided that edotco was looking to grow its tower portfolio via organic and inorganic approaches, and the Philippines was one of its target markets.
"The acquisition is in line with its strategy and the rationales (ie. colocation opportunities, diversification to more stable emerging markets) are in the firm's view, valid.
"While the long-term prospects of these Philippine tower assets is favourable, the acquisition is dilutive to edotco and Axiata's immediate earnings due to the high depreciation and amortisation expenses, as well as high finance costs.
"Based on its 2021 pro-forma statement, the acquisition would lower its 2021 full year profit after tax and minority interest (PATAMI) by RM152 million.
"As such, we are slightly negative on the proposed acquisition," it said.
Meanwhile, Affin Hwang said the acquisition will lift Axiata's pro-forma 2021 gross-debt to earnings before interest, taxes, depreciation, and amortisation ratio to 2.56 times, from 2.87 times.
"To mitigate the higher gross gearing, management shared that edotco is considering bringing in a partner for the Philippines tower investment and is evaluating a number of portfolio optimisation exercises," it said.
"However, the group has no immediate plans to list edotco just yet, as it needs to strategise the plan for some markets such as Myanmar."
The Myanmar market contributed 15 per cent of edotco's 2021A revenue (will be diluted to 13 per cent after the acquisition of the Philippines towers), it added.
Moving forward, Affin Hwang said it had a mixed view on Axiata's business outlook and its ongoing merger and acquisition (M&A) initiatives.
On one hand, it is positive on the earnings outlook of XL, Robi and Axiata Digital.
"But the challenging macroeconomics in Sri Lanka may weigh on Dialog's performance, prosperity tax should hit Celcom's earnings while an earnings dilutive M&A may affect edotco's short-term profitability," it said.
On the corporate M&As, the firm is positive on the proposed Celcom-Digi merger and likes the acquisition of PT Link Net.
On the other hand, it is slightly negative on the earnings dilutive acquisitions in the Philippines towers and Touch Group.
Affin Hwang has cut its 2022-2024 earnings forecasts by 2.0-7.0 per cent after incorporating the proposed acquisition.
The firm has maintained its "Hold" call on the stock with a lower price target of RM3.85.
"We raised our holding company discount and lowered the valuation multiple for Dialog Axiata due to the macroeconomic challenges in Sri Lanka," it said.