On account of XL Axiata's merger with Smartfren to form XLSmart via a share-based transaction, analysts have maintained their OUTPERFORM call for Axiata Group Bhd and has kept the target price at RM2.60 which awards an upside of 24 sen (nearly 10%) over market valuation, according to a research note dated Dec 12 published by Kenanga Investment Bank Bhd (Kenanga Research).

As at 10:20am Dec 12, Axiata's stock traded at RM2.36. (Stock updates from Bursa Malaysia)

The merger deal involves Axiata's 66.5%-owned Indonesian mobile operation XL Axiata and Sinar Mas Group's 77.5%-owned Smartfren, which is practically the sole owner of Indonesia's Smart Telecom, to create a new entity called PT XLSmart Telecom Sejahtera, or simply XLSmart. (Sinar Mas also written as sinarmas at times)

XLSmart will serve a combined mobile subscriber base of around 94.5 million representing around 27% of local market share, making XLSmart the third-largest mobile operator in Indonesia, behind Indosat and Telkomsel.

This transaction is expected to be completed by the second quarter of 2025 after securing approvals from regulators, Indonesia's Financial Services Authority and Ministry of Communication and Digital Affairs, as well as shareholders.

Post-merger, XL Axiata, the surviving entity of the merger, will see its spectrum holdings expanded with the addition of Smartfren's 62MHz of spectrum, resulting in XLSmart's total spectrum holdings of 152MHz. This will position XLSmart as the operator with the second-largest spectrum holdings in Indonesia. Analysts believe that the spectrum factor is the primary driver of the merger.

Upon full integration, XLSmart is expected to realise annual pre-tax synergies of US$300 million to US$400 million, stemming from economies of scale, cost savings and efficiency gains in opex (operating expenditure), capex (capital expenditure) and leases.

Key initiatives to drive these synergies include the decommission of 20%−30% of overlapping sites within XLSmart's network
footprint of 67K sites, selective network expansion in targeted cities with a focus on profitability, leveraged volume and price
book matching to attain best prices from vendors, and finally, direct dealing with retailers and optimised incentive structure.

However, Smartfren's financial health could be a concern. Despite achieving positive earnings before tax in the third quarter of financial year 2024, Smartfren reported year-to-date (up to nine months) losses after tax amounting to IDR1 trillion (~RM294 million).

Axiata plans to capitalise on Sinar Mas's extensive local market expertise, given its position as one of Indonesia's largest conglomerates with a diverse business portfolio involving pulp & paper, agri-business & food, financial services, real estate, communications & technology, energy & infrastructure, and healthcare.

In particular, Axiata is optimistic about leveraging Sinar Mas' data centres to position XLSmart as the preferred Indonesian enterprise service provider by offering end-to-end enterprise solutions, according to Kenanga Research.