Maxis IPO - Comments, Reviews, Analysis

MAXIS

Response to Maxis Bhd’s share sale, Malaysia’s largest initial public offering (IPO), is said to be tepid thus far, with asking prices said to be near the lower end of the RM4.80 and RM5.50 price range that book-runners are indicating, with one or two are at RM5.20, but very few are willing to pay that much.

LTH had publicly declared his fund would not pay more than RM5.20 apiece for Maxis shares. The fund manager is picking up Maxis shares “for benchmarking purposes”.

The final retail and institutional price for the Maxis shares are to be fixed by Nov 10 2009, after the conclusion of the book-building exercise on Nov 9 2009.

Shares of the country’s leading mobile operator are set to debut again on the Main Market in a little over three weeks on Nov 19 2009.

Some 91% of the shares are slated for institutions, while 150 million shares or 6.7% of the total offered shares are for the general public. Retailers are expected to get about 5% to 10% discount on the institutional price.

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What’s NEXT! … Oct 2009

As Maxis’s bookbuilding for the institutional portion of its IPO kicks off, PNB is said to be taking up 20% of the 862 million shares set aside for bumiputera institutional funds. The rest of the shares are expected to go to familiar names such as LTH and KWSP, in particular, is said to be fond of telecommunications stocks.

Sources say EPF is also eyeing a portion but a smaller one than PNB’s.

At the moment, all the funds are going in at RM4.80, which is the strike price for the cornerstone funds. Thus, other mutual funds will be expected to pay higher than that. This represents the lower end of the range that had been reported where the price was expected to fall between Rm4.80 – RM5.50.

Also in the mix, it is leant, are foreign funds such Franklin Templeton Asset Management, which is expected to pay slightll more than Rm5 per share with the intention of taking up between 1% and 2% of the allotted institutional shares.

The common is that Maxis looks expensive even at RM4.80. This is based on the fact that it is only the Malaysian operation that is being listed and that competition in the local telecommunications sector is tough.

However, there is no shortage of suitors, with around two third of the institutional shares taken up even before the book opened on 23^rd Oct 2009. This is because even though it is expensive at RM4.80, the price is acceptable compared to earlier suggested RM6.00.

At an indicative price of rm4.80 to RM5.50 the valuation seems more palatable. Even so, at RM4.80, the institutional portion of the shares – equivalent to 27.67% of maxis’ paid up capital – is worth a cool RM9.94 billion. Assuming the average price placed out to institutional investors while the retail offering stands at 174.8 million shares.

The lure of the lower price aside, the institutional funds know that it would be foolhardy to not include Maxis in their list of investments. The scarcity of shares in which MAXIS Communications Bhd will still hold 70% of the company post listing, ensures intense bidding among institutions.

So, in its current (Oct 2009) position, how much is MAXIS worth to an investor? You can price MAXIS as either a growth stock or a dividend stock.

If it were priced as growth stock, in terms of PER, investors would compare it to what is currently (Oct 2009) listed on the local bourse. Take DIGI, which is currently priced at about 15 times PER. At 15 times PER, Maxis is worth about RM4.50.

If MAXIS is priced as dividend stock, it is worth about RM4.00. This is because DIGI has about 6% dividend yield and a payout ratio of almost 90%. Based on that, if MAXIS gives a dividend of 27 sen based on a 90% payout ratio, the stock will have a yield of 6.8% and therefore, will be worth about RM4.00.

These theories are based on local terms because DIGI is a pure Malaysian player as well.

But if u priced the stock on regional terms, where the average PER is close to 10 to 11 times, the price would be close to RM3.30. These are other companies in the region that give a higher dividend yield of, say 10%.

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Its Prospects … dated Sept 2009

Saudi Telecom Co (STC) has a 25% stake in Binariang GSM Sdn Bhd, the parent company of Maxis.

Two years ago (2007), MAXIS was taken private in a RM39 billion exercise.

By relisting MAXIS, Ananda gains big time on three counts …

· He is relisting only his Malaysian teleco assets whereas the MAXIS he took private in 2007 included international assets.

· Through a series of deft pre-IPO restructuring, Binariang, which he controls privately, will raise billions in cash that will enable him to retire virtually all the debt he and Binariang had taken to privatize MAXIS if he chose to. In short, Binariang will be able to pay the bulk of its debts and still end up controlling 70% of the relisted MAXIS

· Ananda will score brownie points with Najib, who is also finance minister and who wants to put Bursa back on the radar screen of international fund managers the way Malaysia was in the 1990s. To achieve this, Bursa needs more profitable big companies.

At the same time, Binariang need to restructure its debts. Binariang has three denominated debts of RM21 billion and US dollar denominated debt paper of US$900 million. Sources say Binariang needed to shore up its balance sheet to continue to enjoy a debt rating of AA (2) and A (3) respectively for the ringgit and US dollar debts.

The say Binariang needed to inject more money into its Indian telco Aircel Cellular Ltd, but it would have been difficult for it to borrow unless it restructured its existing debt. They also say the global financial crisis meant bank borrowings had become more difficult and expensive.

It was a combination of the financial crisis, which made the US dollar borrowing expensive, and Maxis’ Indian operations requiring capital to expand market share that led to the restructuring of Maxis and listing of its Malaysian arm.

The Indian operation is key to Ananda’s realizing his dream to have a cellular mobile empire with strong presence across Asia.

When Maxis was taken private in 2007, it was primarily because the listed company would incur massive debt due to its operations in India and Indonesia, something that would damp its share price performance. Moreover, the cash being paid as dividends could be used to fund expansion.

Binariang later sold a 51% interest in its Indonesian arm PT Natrindo Telepon Seluler to STC, leaving it and Maxis with Aircel as its major overseas investment.

To compete aggressively, Aircel needs more capital, an asset not all shareholders of Binariang may be comfortable with.

The biggest shareholder of Binariang is Ananda, with a37% stake, followed by Harapan Nusantara Sdn Bhd, with 30%. STC holds 25% equity stake while Shield Estate NV, a vehicle linked to Ananda has 8%.

Aircel’s capital expansion programme over the next four years (2010-2013) is about RM16.4 billion and this is expected to be primarily financed via additional equity and/or debt.

In line with Aircel’s funding needs, the group (Binariang) debt load is expected to balloon to around RM25 billion in 2010 (from RM21 billion as at Dec 2008).

It was the rating rationale that gave the market the first indication of the need for Binariang to undergo a restructuring to give Aircel additional funds to accelerate expansion.

The restructuring and relisting of Maxis are being done in a manner that will solve Binariang’s balance sheet and funding woes and give the company the flexibility to expand in India and other countries without burdening shareholders.

MCB will list its Malaysian arm Maxis Bhd by divesting 30% or 2.25 billion shares to investors. MCB is wholly owned by Binariang.

Assuming the sale is done at Rm5 per share, the divestment will net MCB some RM11.3 billion and value the Malaysian assets at RM37.7 billion. This compares with the RM39 billion valuation of Maxis that included its entire Malaysian and overseas assets when it was taken private.

Also, prior to the relisting, MCB is undergoing a restructuring that will see Maxis acquiring assets from the parent (MCB) for close to Rm4 billion and also receiving a dividend payment amounting to RM4.03 billion.

As a result of the pre-listing restructuring, Maxis will owe MCB RM4.99 billion. Maxis will seek Rm5 billion long term external debt to repay the debt.

Apart from that, four subsidiaries of MCB have declared dividends to MCB to the tune of RM4.03 billion before the upcoming listing .Of this amount, some RM2.84billion was paid in cash. The remaining RM1.18 billion will be settled by Maxis from the Rm5 billion borrowing. The dividends were declared by utilizing the retained earnings of four subsidiaries, which will come under the Malaysian arm Maxis after the listing.

Apart from dividends from the four subsidiaries, Binariang also received dividends to the tune of RM290 million in respect of redeemable convertible preference shares in Maxis Broadband.

In a nutshell, even prior to the listing, MCB (which is 100% owned by Binariang) will receive Rm7.84 billion in dividends and divestment of assets arising from the prelisting restructuring. Together with the RM290 million that Binariang received for its preference shares, the total sum MCB will ;ay the holding company is more than RM8 billion.

Add the post IPO proceeds of some RM11.3 billion (assuming the sale of 30% of Maxis is done at RM5 per share) to the Rm8 billion and the total proceeds that Binariang will get are more than a whopping RM19 billion. That is not too far off the cost incurred by Ananda and Binariang when they took Maxis private.

Then, Binariang had piled on ringgit debt papers of RM21 billion that were used to buy out old Maxis’ minority shareholders.

What is the upside for Ananda and Binariang after Maxis Bhd is relisted?

When Maxis was take private, it had both the international and local businesses. Now (Sept 2009), only the local arm is being relisted and the proceeds received will almost cover the debt incurred in taking Maxis private, if the shares are sold at Rm5 and above.

Effectively, if the shares are sold at Rm5, this will value the Malaysian operations at Rm37.7 billion. When Maxis was privatized at RM15.60 per share, the company’s market capitalization stood at Rm39 billion.

Also, after taking Maxis private, STC invested a total of US$3.1 billion to take a 51% stake in Maxis Indonesian operations and a 25% stake in Binariang. This was done via an issue of new shares, which meant the money went to Binariang’s coffers, hence reducing its cost of taking the old Maxis private by some RM10 billion.

The funds from STC are said to have been channeled into Binariang‘s overseas operations. Also, STC, together with Binariang, jointly underwrote a US$900 million loan for the Indian expansion.

If Ananda can raise enough funds from the relisting to pay off the ringgit papers raised to fund the fund the privatization of Maxis, he will free Binariang from a substantial amount of debt and still end up owning 70% of a listed Maxis and 100% of MCB’s overseas arm.

But the question is, will Maxis be able to lost a Rm5 a share or more?

So far, based on reports, the valuations given to Maxis range from Rm4 to Rm6, depending on the kind of valuation method.

If based on EV/Ebitda, a RM5 tag is too high as it would translate to more than nine times EV/Edita. On the other had, if Maxis is positioned as a dividend play, it can fetch a higher price of about rm5 a share. But then if investor is looking at dividend play, there are other options such as DIGI and Axiata.

A New Versus Old Maxis

When Maxis or old Maxis debuted on the Main Board in July 2002 with just over three million subscribers, Malaysia mobile penetration rate was under 40%. By the time it was privatized five years ago in July 2007, Malaysia’s mobile penetration rate had gone just above 90% and its subscriber base had more than tripled.

Between 2006 and 2008, Maxis’ revenue grew 21.5% to Rm8.45 billion in FY2008 from RM6.96 billion in FY2006 even as its mobile subscriber base expanded around 18% a year in Dec 2008 from Dec 2006. Mobile revenue, which made up over 90% of Maxis group revenue, grew 20.4% to RM7.9 billion in 2008 from Rm6.5 billion in 2006.

Today (2009), Malaysia’s mobile penetration rate is already above 100% alongside regional countries. Mobile operators are now (2009) looking to services such as mobile broadband as well as value added 3G data services to grow or maintain average revenue per user numbers.

The battle for price sensitive prepaid users has also become cutthroat, with at least four active mobile virtual network operators selling rebranding mobile services rising Celcom Bhd’s network.

And it is in this scenario of a highly competitive near saturated market than Maxis Bhd or the new Maxis is seeking to list on the Main Board without its sister companies in India and Indonesia that are still in the red due to start up losses.

Given tougher market conditions, the question is. What kind of growth can Maxis deliver in the current environment?

From the growth that Maxis has delivered over the past two years under the new group CEO, the need to perform remains imperative. Maxis os after all still under AK company.

In Malaysia, Maxis is still the leading mobile operator, with its 11.25 million subscriber base, commanding 40% of the market ahead of Celcom’s 34%, Digi’s 25% and U Mobile’s 0.7%. Maxis’s revenue market share also remains the largest.

However, due to competitive pressures, Maxis’ Ebita margin fell for the six months ended June 2009. Celcom’ slide however was relatively smaller.

There are also Maxis dominance coming under threat.

Its postpaid revenue market share has slipped below the 50% mark. It is also no longer the leader in terms of prepaid ARPU. Maxis was the only one of the big time operators to lose prepaid subscriber market share in 1H2009.

Celcom has made known its intention to unseat Maxis as market leader by 2011.

In terms of mobile broadband users, Celcom has been more successful in growing its subscriber base.

Nonetheless, the fact remains that competition is getting tougher and margins are being eroded. Without the potential growth factor from markets abroad, Maxis’ valuations would likely be closely tied to its ability to generate cash and pay dividends.

At the indicative IPO price of for institutional investors is RM5.50 apiece and retail price of Rm4.95) to be fair as it would imply an equity valuation of RM37.1 billion or 16.3 times annualized 1HFY2009 earnings and nine times EV/Ebita.

The valuation is on par with the prospective PER of 14 to 16 times at which domestic and regional mobile companies are trading..

Be that as it may, the absence of the potential growth factor from markets abroad and heightening competition in a near saturated market at home mean it would be tough for the new Maxis to outshine the old Maxis.