EC approves the merger between 3 Italia and Wind Italia
The European Commission has just granted approval for the merger of 3 Italia andWind Italia. CKH will own 50% of the merged entity, which should have approximatelya one-third share of mobile service revenue in Italy. We believe the deal 'fixes' Italy asthe last negative FCF market (negative cHK$1.5bn in 2015) for 3 Group, and shoulddrive 10% EPS growth in 2017E (vs c2% growth in 2014-16). CKH said it expects thedeal to complete in Q416.
Solid track record in deal execution; JV to start paying dividend in 2018
The company indicated that cash cost synergies will amount to more than EUR5bn inNAV, with an annual run-rate of EUR700m (EUR490m/210m opex/capex). Our analysisindicates that CKH has delivered cost synergies in excess of budget in Austria (dealcompleted in early-2013) and realised 60-65% of planned synergies in Ireland (dealcompleted in mid-2014). Based on our pro forma cashflow analysis, we expect the JVwill start paying dividends in 2018, with attributable dividend income rising fromHK$0.35/sh to HK$1.0/sh as the JV's gearing reduces.
Incremental HK$1.2-1.3/sh EPS when fully ramped up.
We have factored in the cost synergies of the Italian merger, by assuming 30% of theplanned synergies will be delivered in year 1, rising to 60% in year 2, and 100% in year3. We now assume a depreciation saving of EUR700m as a result of the purchase priceallocation exercise. On this basis, we raise our EPS by 1-5% for 2016E-18E. We believethe Italian deal could drive an incremental EPS uplift of HK$1.2-1.3/sh when theplanned synergies are fully realised.
Valuation: Reiterate Buy, PT HK$117.00 (previously HK$107.00)
We value CKH based on a discount to our SOTP-derived end-2017 NAV estimate ofHK$138/sh (previously HK$134/share for end-2016E). We narrow our target discountto NAV to 15% (from 20%) to account for improved cashflow profile and growthoutlook, as the company executes the merger. As such, we raise our PT by 8% toHK$117.00/sh (previously HK$107.00/sh). At 10.9x 2017E PE (vs historical average of12x), we believe CKH looks attractive relative to CKH's improved cashflow profile,business mix and growth outlook.