Following he recent DiGi and Axiata Celcom tie-up ana;ysts are giving the thumbs up to Axiata for a buy. They based this on an expected cash savings of some RM2.2 billion over 10 years.
The two telecommunications companies, Celcom and DiGi had on Tuesday entered into a three-yearnetwork collaboration pact, where both parties will collaborate on sites, access transmission, aggregate transmission and trunk fiber transmission which will cover 218 sites under Phase 1.
Axiata remained OSK Research's top pick for domestic and regional telecoms exposure, given the strong prospects accorded by its regional mobile assets. It said the progressive ramp-up of sites over 10 years implies that the bulk of capital expenditure (capex)/operational expenditure (opex) savings would be back-loaded.
It gave a buy rating and a RM5.80 target price on Axiata, but maintained its neutral call on DiGi with a target price of RM24.40. OSK expects the cost savings from the collaboration to boost DiGi’s earnings from financial year 2012 (FY12) on top of the internal cost-down initiatives already in place.
"We believe the savings in terms of opex will be more apparent for DiGi, given that network cost constitutes 12% of DiGi’s revenue versus 10% for Celcom," it said in a report.
HwangDBS Vickers Research also gave similar calls on Axiata and DiGi, but lower target prices of RM5.10 and RM22.90, respectively.
It said that Celcom Axiata Bhd continues to do well especially in the broadband segment in addition to exposure in fast-growing overseas markets including Indonesia, Sri Lanka and Bangladesh.
Overall, HwangDBS said it is neutral on the DiGi and Axiata Celcom development, given expected marginal impact on FY12F earnings and its discounted cash flow-based (DCF) valuations.
"Assuming 50:50 capex to expense savings ratio (and 50:50 savings proportion between DiGi and Celcom), this could expand DiGi’s and Axiata’s FY12F Ebitda margins by 0.1-0.3 percentage points. It could also raise DiGi’s and Axiata’s target prices by 20 sen and 5 sen respectively," it said.
Meanwhile, Alliance Research has raised its FY12 earnings projection for DiGi and Axiata by 9.2% and 3.8% respectively. It also increased its target price for DiGi to RM26.50 from RM24.10, but maintained that for Axiata at RM5.42 per share.
It said the tie-up is timely as cost efficiency is pivotal in expanding margins given the saturated telco market in Malaysia and anticipates more similar tie-ups between players in the future.
To my best bet, it looks like Axiata will possibly ascend to the RM5.20 level at best bat.
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