>AXIATA GROUP (CITI)

Downgrade to Sell: Fully Valued + Fire Behind Idea Smoke?

■ Fully valued now – We see the stock as fully valued on a sum-of-parts after its ~60% rise off March 2009 lows. Operational outlook is underwhelming as is the patchy execution track record. Valuations are expensive (14x PE, 6.0x EV/EBITDA) and dividend yield is paltry at best. We downgrade to Sell/High Risk (from Hold/High Risk) with a new target price of RM2.25 (from RM2.07).

■ More Idea? – The Business Standard in India reported (28 May 09) that Axiata intends to launch a voluntary offer for 20% of Idea at Rs130-135/share. Axiata has dismissed the report as speculation and cites a shareholders' agreement limiting Axiata's stake to 20% (at 14.99% now, 19% post Spice+Idea merger). Should a deal materialize as reported, though, we believe the market would focus on funding concerns (we est. US$1.8bn for the stake) and valuation
premiums (66% above CIRA TP of Rs80) as overshadowing long-term positives.

■ Overseas assets need work – We still believe that Axiata's stable of overseas assets hold long-term attractions, particularly given exposure to growth markets. Still, short-term challenges can't be ignored, with Dialog struggling with poor profitability and XL facing a funding crunch likely necessitating a rights issue. Celcom stays the main earnings and cash driver for now.

■ Cutting 2009 estimates – Following 1Q09 results, we cut 2009 earnings by 5.4%, reflecting weak Dialog and XL earnings but offset by stronger than expected Celcom performance. Our new TP of RM2.25 reflects higher Celcom contribution to NAV and CIRA's new TP for Idea of Rs80/ share.

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