KUALA LUMPUR: RHB Research Institute is maintaining its Outperform on Axiata at RM3.85 with a fair value of RM4.05 as it continues to like Axiata for its strong earnings growth and exposure to the recovery in emerging markets where mobile penetration rates remain low.

It said on Friday, March 12 Axiata had proposed an international private placement of up to 1.7 billion XL shares, representing 20% of XL’s issued share capital, to eligible institutional/sophisticated investors via a bookbuilding exercise.

The proposed offering is mainly to increase XL’s free float, which could be raised up to 20.2%, from 0.2% currently. Axiata’s stake could then fall to around 66.5% while Emirates Telecommunications Corporation would hold the remaining 13.3%.

“XL’s share price closed yesterday at a 52-week high of Rp3,550/share. Assuming the shares are placed out at a 15% discount to this price, we estimate Axiata could potentially raise a (gross) total of around RM1.7 billion (20 sen/share),” it said.

RHB Research said Axiata’s reduced stake in XL would mean that its share of XL’s future net profits would now be lower as well.

However, this could be mitigated by lower interest expense if the abovementioned amount raised is used to pare down borrowings. Assuming such a scenario, we estimate the proposed offering could be marginally dilutive to the group’s earnings (up to 2%).

“We thus estimate Axiata’s proforma net debt/EBITDA as at end-2009 would fall further to 1.5 times from 1.8 times currently. This, we think, would help further ease concerns regarding Idea’s potential funding need (Axiata’s portion estimated at US$200-300m previously).

“In addition, while we would not be surprised if management decides to return some of the cash to shareholders, we doubt the amount would be significant. However, we think that Axiata’s fast-improving gearing levels could allow the group to start declaring “regular” dividends earlier than expected,” it said.