edotco aims for more market share
PETALING JAYA: edotco Sdn Bhd group is paying a premium that could set a precedent for future round deals to achieve higher multiples, although their decision is to gain more market share.
The plan to purchase 1,000 towers from Touch Mindscape Sdn Bhd (TMs) for RM1.7bil will increase its market share to 25% from the current 21%. The towers allow it to capitalize on the growth in demand for fiber infrastructure, particularly in a 5G environment.
Edotco’s ambition is to become the top five in the world and the top three in Asia in terms of number of laps by 2024 and the plan is to grow organically or inorganically. Hence the desire to pay a premium.
MIDF Research estimated that despite the high premium, the acquisition is strategic and will strengthen Axiata’s position in the tower infrastructure sector in Malaysia.
Kenanga Research said it suspects that edotco is paying a premium due to the scarcity of tower company acquisition targets and attractive TM rental rates.
While it is not fair to compare the valuation multiples of regional towerco transactions, Kenanga notes that towerco transactions in Indonesia have ranged from 10 to 15 times EV / Ebitda (enterprise value / earnings before amortization and depreciation). interest taxes).
“Our estimate of the bullish, base and bearish cases for the TM Ebitda margin is 80% / 75% / 70%. These scenarios involve EV / Ebitda of 12 times / 13 times / 14 times, respectively. These multiples are greater than the seven times we have attributed to OCK Group Bhd and nine times we have awarded edotco, ”he adds.
It assumes that the RM 1.7 billion deal will be funded with RM 1.45 billion (85%) in debt, the remainder RM 250 million (15%) in cash.
edotco has cash and cash equivalents of RM 1.4 billion in September 2021 and allows it to comfortably fund the cash portion of the transaction. Assuming an interest rate of 1.96%, according to its announcement, the debt results in an additional annual interest cost of RM 27.4 million.
It estimates that TMs will achieve net profit of RM 23.3 million in fiscal year (FY) 2022.
MIDF said it expects the proposed acquisition to positively contribute to Axiata’s future earnings and support its long-term strategies and goals.
However, he made no changes to his earnings estimates pending the completion of the acquisition. He is maintaining his call option on Axiata with an unchanged target price (TP) of RM 5.39 per share.
Kenanga said the acquisition had a dilutive effect on short-term earnings. The additional debt offsets edotco’s 9% EBITDA contribution, reducing the TP by two sen, which is insignificant. He maintains a “market performance” for Axiata at RM 4.20 per share.