Analysts see positives for XL Axiata from investment in Link Net
ANALYSTS are positive on prospects for Axiata Group and its Indonesian subsidiary, XL Axiata, after they announced the acquisition of a 66 per cent stake in Link Net.
The discussed transaction price of the sales purchase agreement amounts to 4,800 rupiah per share of Link Net, which translates to a total of 8.72 trillion rupiah (S$821 million). Axiata Investment Indonesia will acquire 46 per cent of outstanding Link Net (Link) shares while XL Axiata (XL) will acquire 20 per cent.
Following this announcement, UOB Kay Hian analyst Selvi Ocktaviani sees a positive earnings accretion of 3-9 per cent for the Indonesian telecommunications services operator, XL. Based on the 2023 estimates, she expects XL to book the Link acquisition as an investment associate and projects a net profit of 46-118 billion rupiah, said UOBKH's research report on Monday (Jan 31).
The analyst noted that there is room to support fluctuations in profitability and interest rates. Results from a sensitivity analysis show that XL may still have a growth in earnings as long as the Link Net profit decreases by less than 25 per cent or interest rate does not spike more than 225 basis points, she said.
Ocktaviani assumes that XL will raise debt to fund the acquisition, raising the estimated net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) by 2.5 times. However, this is still seen as a "small impact" on XL's leverage, the report stated.
With Link's strong customer bases of middle to high spending abilities in major cities, the acquisition is also expected to generate synergies and bring more customers.
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"The Link acquisition is expected to generate synergies from the sharing of backbone and fibre optic infrastructures. XL can enter fixed-mobile convergence strategy by offering Link customers with XL-Axis mobile data packages and vice versa," she said. She anticipates the growth of XL's competitiveness and customer base from the agreement with Link.
Likewise, CGS-CIMB is positive on the acquisition and believes that XL Axiata is "beefed up and ready to capture growth".
The brokerage believes valuations for the deal were reasonable and that the agreement will increase XL's earnings per share (EPS). The price tag of 4,800 rupiah for a Link Net share is valued at a reasonable FY 2022 enterprise value to Ebitda ratio of 5.5 and price-to-earnings ratio of 14.4, CGS-CIMB said.
CGS-CIMB expects XL to use a mix of internal cash and new debt to fund the acquisition and therefore, estimates net debt to Ebitda ratio to rise from 0.29 to 0.47 but believes it is still in the "healthy" range. It also projects that the deal will be slightly core EPS accretive by 0.7-3.1 per cent from FY 2022 to FY 2023 and by a bigger 3.4-9.3 per cent from FY 2024 to FY 2031.
With the acquisition of Link Net, XL is positioned to capture growth and strengthen market position, CGS-CIMB highlighted. The number of homes XL serves will increase from about 600,000 to 3.4 million and this allows the company to capture Indonesia's strong demand for fixed broadband, the brokerage said.
"There are also revenue synergies from cross-selling mobile, broadband and pay TV services to the combined subs base, in our view," CGS-CIMB added.
It is also of the opinion that offering convergence products will help to strengthen XL's market position and raise its customer lifetime value as more of them would stay as customers for a longer period. The use of common back-end systems also generates cost synergies and both parties can leverage each other's fibre backbone, the brokerage said.
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