Research houses maintain neutral rating on Telecom sector amid proposed Celcom-Digi merger

In a note today, it said the recent development is a positive move to the sector as the merger will keep national interest intact with more than 51 per cent local ownership.

"We see potential synergies mainly coming from minimising asset duplication, and not from forced layoffs and believe this deal is more likely to go through as compared to the failed attempt to merge in 2019.

"Overall, we maintain 'neutral' pending a deal completion and given that information at the moment is too sparse for us to pencil in a realistic scenario," said the research house.

In a separate note, Public Investment Bank Bhd also maintained their 'neutral' and 'outperform' rating on Axiata and Digi respectively, due to pending further details on the structure and valuation of the merger between the two cellular service providers.

It said in this second attempt to merge after 2019's proposal was called off due to the inability to reach an agreement on shareholding structure, the new proposed merger is less complicated as both parties are only consolidating their Malaysian operations.

"Also, with national interest firmly in place, we believe this merger would be given the green light by the regulators and authorities," said the bank.

Meanwhile, AmInvestment Bank Bhd noted that the merger proposal will see Digi likely to acquire Celcom via a share swap together with a cash equalisation sum of RM2 billion, of which RM1.7 billion will come from new Digi debt and RM300mil from Telenor.

"Both Axiata and Telenor will have equal stakes of 33.1 per cent each in the merged entity which will be called Celcom Digi, with the balance held by Digi's minority shareholder," it said.

Therefore the bank has maintained its 'overweight' rating on the telecom sector while retaining its 'hold' call on Digi share at the moment with expectation to upgrade to a 'buy' call should the parties complete the value-accretive agreement.

In the meantime, CGS-CIMB Research said the advanced discussion between Axiata and Telenor to form a new company Celcom Digi is a major win to Digi and Celcom as it will have a financial year 2020 (FY20) proforma total revenue of RM12.4 billion and pre-synergy EBITDA of RM5.7 billion.

The proposed merger, once completed, will be the clear number one cellular company in Malaysia with 19.1 million subscribers and a mobile service revenue market share of 52 per cent.

The research house revised its call from 'hold' to 'add' for Digi shares with a 14 per cent higher touch point of RM4.55.

At noon today, Digi share price stood at RM4.47, up 72 sen per share from its last quoted price.