KUALA LUMPUR (March 20): Axiata Group Bhd (KL:AXIATA) may face near-term earnings pressure as its Indonesian unit nears the completion of a merger, analysts warned.

The deconsolidation of its unit PT XL Axiata from its accounts will cut into profits while integration costs with Smartfren Telecom will weigh on the combined entity’s bottom line for at least two years, according to analysts who attended a briefing on the progress of the merger.

Near-term earnings could also be affected by Smartfren’s losses while the company would only see “pre-tax synergies” with a run rate of up to US$400 million (RM1.77 billion) per year after a two-year gestation period, said Apex Securities. For now, “we retain our cautious view”, the research house said.

Axiata signed a definitive agreement with Sinar Mas to proceed with the merger of XL Axiata with Smartfren and its subsidiary PT Smart Telcom. If the deal goes through, Axiata’s holdings in the enlarged unit will be reduced to 47.9% from 66.5% currently.

Shares of Axiata are now hovering near their lowest in more than 15 years after losing more than 28% of their value since the start of 2025. Despite the short-term pain by the middle of 2025, analysts are still mostly bullish on Axiata with ‘buy’ calls far outnumbering ‘hold’ and ‘sell’ ratings.

The consensus target price is RM2.75, according to Bloomberg, suggesting a massive 56% gain in the next 12 months from its last price of RM1.76.

“In the immediate term, we believe the merger and the reduction of XL’s stake could create an earnings gap for the group,” Kenanga Investment Bank said.

Further, the merger may also struggle to achieve its average revenue per user due to the inflationary headwinds and intense competition from Telkomsel, Indonesia’s biggest telco by revenue, the research house flagged.

XL Axiata has selectively raised tariffs in certain regions since September 2024, betting on rivals to follow suit, Kenanga said. “However, this has yet to materialise, as Telkomsel maintained aggressive nationwide pricing for its Lite prepaid packs and vouchers since February 2024,” it noted.

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