KUALA LUMPUR (June 22): Analysts have upgraded their target prices (TPs) for Axiata Group Bhd and Digi.Com Bhd following the inking of transaction agreements for the proposed merger of Celcom Axiata Bhd and Digi.Com (MergeCo).
In separate notes to clients, RHB Research analyst Jeffrey Tan raised his TPs for the counters. In the case of Axiata, Tan’s TP is now higher at RM4.75 from RM3.80. For Digi.Com, the RHB analyst increased his TP to RM4.78 from RM4.18 previously.
He also upgraded both Axiata and Digi.com to “buy” calls from “neutral” previously.
Meanwhile, Kenanga Research’s Lim Khai Xhiang also raised the TPs for both counters but maintained the calls on both Axiata and Digi.Com.
Lim maintained the research house’s “market perform” call on Digi.Com, while raising the TP to RM4.25 from RM3.75.
As for Axiata, the analyst maintained the “outperform” call and raised the TP for the counter to RM4.45.
At the time of writing today, Digi.Com was higher by 15 sen or 3.47% at RM4.47, while Axiata was up five sen or 1.26% at RM4.03.
In a note today, RHB’s Tan stated that based on the guidance of RM8 billion or RM800 million per annum in cost synergies from the merger, and interest savings (RM2 billion cash from Telenor and Digi.Com), Axiata’s earnings for the financial year ending Dec 31, 2022 (FY22) will see a 13% accretion.
“Pending further clarity of the scope of cost savings/synergies with detailed work to start in the integration planning phase, we leave our forecasts unchanged for now. Axiata is rated ‘good’ overall in RHB’s proprietary environmental, social and governance (ESG) benchmark,” said Tan.
He added that the estimated merger synergies are “higher than expected” as the guided synergies to the tune of RM8 billion are ahead of RHB’s and market estimates of RM5 billion to RM7 billion.
In the case of Digi.Com, the higher TP was given after building in cost synergies and higher net debt, having noted that the overall merger construct is positive (from lower competition, balance sheet strength perspectives), with initial synergies estimated at a higher-than-expected RM8 billion.
“Digi.Com scores highly in RHB’s EGS rating at 3.3,” Tan said.
For FY21, FY22 and FY23, Tan forecast Digi.Com to post RM1.11 billion, RM1.17 billion and RM1.16 billion respectively in net profit.
The analyst projected that Axiata will post net profits of RM946 million, RM1.09 billion and RM1.18 billion for FY21, FY22 and FY23 respectively.
Meanwhile, Kenanga’s Lim noted that the merger values Celcom at 9.4 times forward enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/EBITDA), which the analyst deemed as “fair”.
Axiata’s stake in the MergeCo would lift its Malaysian company’s profit by 14%, Lim added.
On Digi.Com, the Kenanga analyst explained that it was switching its TP for the counter to that of the MergeCo, and temporarily switched its valuation method to discounted cash flow (DCF) from EV/EBITDA.
“We have ascribed a forward 10.5 times EV/EBITDA multiple to the MergeCo’s FY22 EBITDA of RM6 billion. The 10.5 times sits between Digi.Com’s ascribed 11.6 times and the merger-implied forward 9.4 times for Celcom. The 9% discount from the Digi multiple accounts for: i) Celcom’s lower profitability; and ii) integration risks. With synergies likely to meaningfully contribute earliest in FY23, we caution against the numerous headwinds that the mobile operators will continue to face in the near future as separate entities, which we have accounted for in our existing estimates,” Lim viewed.
