Brokers' take: CGS-CIMB positive on Digi, Axiata as companies pursue merger

CGS-CIMB on Friday upgraded Malaysia-listed DiGi.com to "add" from its previous "hold", with a higher target price of RM4.55 from its previous RM4.00. It also raised its target price for Axiata Group to RM4.20, from RM4.10 previously. CGS-CIMB has an "add" call on Axiata.

Axiata is in advanced talks with Telenor to merge its Malaysian telecoms business Celcom with Digi. Norway's Telenor is the largest shareholder of Malaysian telco Digi.

In its report, CGS-CIMB noted that the resulting company, Celcom Digi, will be "the clear No 1 celco in Malaysia" with a revenue market share of 52 per cent.

The higher target price for Axiata comes from the assumption that Axiata will swap its 100 per cent stake in Celcom for a 33.1 per cent stake in the new merged entity as well as an additional RM2 billion (S$649 million) in cash.

Digi, meanwhile, will be a larger entity if the deal is completed. CGS-CIMB is projecting a 7.4 per cent increase in core earnings per share for FY2022.

Axiata and Telenor had been unsuccessful in a 2019 attempt to merge their Asian operations in 2019. But CGS-CIMB said there is a "better chance" of the current deal materialising because it is simpler.

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Merger discussions this time involve only the Malaysian assets, rather than regional assets.

There is also a "greater need" to merge now because of the Malaysian government's plans for the rolling out of 5G services, CGS-CIMB said.

In February, the Malaysian Communications and Multimedia Commission announced a plan for a wholesale 5G network to be owned by a state-owned special purpose vehicle (SPV). The SPV will sell wholesale bandwidth to all operators.

Fitch Ratings said in a commentary on Friday that this wholesale plan would "intensify rivalry among mobile operators", shifting competition from infrastructure to services.

Merging Digi and Celcom would therefore create a more competitive entity, Fitch Ratings said, with "scale advantages to compete on data pricing, spectrum holding and network capabilities".