Thursday, March 15, 2012

Axiata

It sees its associate investments in India and Singapore as a strategic holdings and has no imminent plans to change the status quo. In Singapore and India , it is either up of out for them. They are not in the business of holding minority. CEO’s comments sparked questions whether some form of change including stakes sale, may happen over the medium term if things do not pan out the way Axiata wants. Axiata owns 29% stake in M1 Ltd and 19.1% stake of Idea Cellular Ltd.

In 2010, Axiata said its lack of management control at the associate companies reduces its ability to identify and manage risks however, there are exceptions. This is especially so in cases without management control. Nonetheless, Axiata has a long term view on both India and Singapore which represent important and strategic stakes, stressing that the group has every confidence in its partners in the two countries. It is happy with its current stake and have no imminent plans to change the status quo. Even so, it would seem change – either selling or the raising its stake – it is entirely out of the window. Whatever the case, the price tag is often the deciding factor whether any change takes place.

Market observers said that in India , Axiata sees a window of two to three years for it to raise its stake in Idea, after which growth would be slower and the case for investing in Idea would diminish. Axiata is not keen on committing more capital unless it comes with control. Axiata can only raise its stake to a maximum of 20.11% being the threshold allowed by Idea’s major shareholder, the Aditya Birla group. Given the uncertainties in India and the large gap between what Axiata is prepared to pay and what Birla wants, market observers do not think Axiata will raise its stake in Idea in the future.

Though Axiata would consider upping its stake in M1 although there is nothing imminent. One factor in favor of such a move is its ability to gear up given M1’s strong cash flow generation and low cost of funding in Singapore . M1 and Singapore are seen as a test bed for new products and services. Takeover offers usually happen for greater control and exposure of a company in high growth markets. While M1 has room to grow in Singapore , it is faced with competitors with bigger market share and deeper pockets. Singapore is already a matured market.

Should Axiata choose to pare some of its holdings, it could further boost its coffers for investments in faster growing markets like in Sri Lanka and Cambodia, where it is present, but see opportunities to further consolidate its position. There may also opportunities in Indonesia where UAE based Emirates Telecommunciations Corp for instance is said to be looking to sell its 13.3% stake in PT XL Axiata Tbk, in which Axiata controls 67% stake. The sale if happens, would improve XL’s free float to 33.4% from 20.1% but the anticipation of more shares entering the market could weaken XL’s share price.

As it is, Axiata already looking at various ways of improving its return through measures such as infra sharing with rivals to reduce capital and operating expenditure. It is also considering investments in asset light businesses.

Target Price: 5.80 (CIMB), 5.50 (UOBKayHian), 5.50 (MBB), 4.46 (Affin), 5.15 (RHB), 5.85 (MIDF), 5.10 (JP Morgan), 5.60 (OSK), 5.15 (HDBS), 5.48 (CIMB)

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