KUALA LUMPUR: ECMLibra Investment Research has downgraded Axiata Group from Buy to Hold as its share price had surged close to its sum-of-parts target price of RM3.12.

Axiata's 83.8%-owned Indonesian subsidiary, PT Excelcomindo Pratama Tbk (XL) yesterday announced its plan to embark on a rights issue to raise gross proceeds of approximately US$300 million (RM1.05 billion).
The funds raised from the rights issue will be primarily used to repay debt, de-leverage XL’s balance sheet to continue investing for growth and maintain a strong credit profile.

The rights issue will consist of equity and mandatory convertible notes (MCN). The size of equity and MCN, final issue price of the common shares and conversion price of MCN will be determined later and released at a later date.

The major shareholders of XL, Axiata and Emirates Telecommunications Corporation International Indonesia Ltd (Emirates) have both agreed to fully subscribe to their rights entitlement under the rights issue. Emirates has a 16% stake in XL. The rights issue is expected to be completed in 4Q09.

ECMLibra Investment Research said the news did not come as a surprise as XL had alluded to plans to raise capital after it did not succeed in the selling of its 7,000 telco towers due to unsatisfactory bidding prices and tight financing as a result of the global economic downturn. The planned sale of the telco towers was supposed
to part finance XL’s capex requirements this year, estimated at US$300 million to RM400 million.

"We view the move to raise capital positively for XL as a stronger balance sheet will allow XL to continue building more capacity and expand in Indonesia. In addition, the exercise will help allay any concerns on XL’s inability to meet debt covenants.

"However, Axiata’s cash and bank balances will reduce to about RM980 million upon subscribing its own portion of XL’s rights issue. This will almost certainly rule out any potential M&A at least this year, given its own recent de-leveraging exercise 2Q09," it said.