Saturday September 26, 2009

Maxis redialled: The celco pitches its appeal to the public – again

By ANITA GABRIEL

THE imminent “homecoming” of Maxis Bhd, ex-overseas operations, barely two years after the public line was cut, has once again turned the market all fizzy. Not shabby for a year about to be stamped as the most rotten period ever for initial public offerings.

Imagine this. Every single Maxis mobile service subscriber – there are 11 million of you – will soon get a form in their mailbox for a slice of what promises to be the largest and most awaited action in Malaysia’s deal-hungry corporate stage this year – the re-call of Maxis Bhd into the public domain. Now, think again – tough luck.

Unless of course, you are one of the 4,175 “Elite” members with monthly bills exceeding RM1,000 or 17,000 of the 450,000 postpaid customers who hit jackpot (or in less exaggerated terms, secure 1,000 shares each) at the restricted ballot. Or this – if you land a shot at the public offering.

Back to life

The region’s lifeless IPO market is beginning to show some bounce. The nail-biting wild swings in major stock markets have eased up, closing the valuation gap and aiding bankers and company promoters to better time and price new listings. “It’s not so frustrating any more,” says a visibly relieved banker.

After a year-long IPO slump and the recent run up in equities, the retail crowd seems hungry for new papers as they, some more gingerly than their brave brethren, flock back to the market.

For one, Indian IPOs have evidently picked up. In July, Adani Power closed a US$625mil stock offering which was 22 times oversubscribed. A month later, a larger IPO worth US$1.25bil came to the table, this time, by state-run National Hydroelectric Power Corporation and more recently, Oil India’s US$570mil offering was subscribed by almost 31 times.

There’s more encouragement elsewhere. Hong Kong is seeing a champagne-popping IPO frenzy. Recently, China’s largest drug distributor Sinopharm’s US$1.1bil IPO in Hong Kong received a rousing reception with an eye-popping take up rate of over 60 times. Crunch this - it has been reported that a staggering US$30bil-US$35bil is expected to be raised in Hong Kong IPOs by year end and some US$100 bil across Asia through new listings, rights offerings and follow on deals this year.

Sadly though, the longevity of this sudden IPO wave is in serious doubt. While most IPOs in recent months have scored spectacular and brag-worthy subscription, post listing, their share prices haven’t had a dream run. This signals one thing - there may be abundant liquidity sloshing around, but most investors, battle scarred from the recent gyrations, are still risk averse.

Maxis needs to move fast if it wants to tap this IPO gravy train. The sense of urgency is palpable and Maxis’ top officials know this only too well. “The company has been working with the Securities Commission for weeks. Lots of the major details have been ironed out and it’s targeting to get listed before end November to catch the window. There are a large number of IPOs in Hong Kong, Singapore, China towards end of this year and early next year.

“Maxis must get in before them,” says a company source.

The offer on the table

It is arguably one of the most discussed, dissected and speculated IPOs, even long before the plans turned concrete. Maxis’ prospectus exposure draft was lodged a week ago on Sept 17 and is posted on the Securities Commission website. A day later, it made the news – in a splash.

The exposure draft is open for public feedback till October 12. So far, it is learnt that it has drawn a couple of responses “just comments … not complaints.” “Essentially, it (the idea of having a draft exposure) is a safe box for people to come and talk to the SC about the prospectus so everyone can work towards improving the level of disclosure,” says an observer.

There’s very little that’s modest about Maxis and its history. When it was first listed in 2002, it was touted as one of country’s largest initial public offering (IPO). Five years later in 2007, it was wrested from its seat on the stock exchange in arguably one of Asia’s largest Leverage Buy Outs (RM40bil). Two years later and months away from a re-appearance in the stock market, it is now being pitched as the country’s largest IPO – ever.

This time, Maxis, as a result of a pre-listing revamp exercise, will merely envelope the domestic cellular operations; it excludes the pre-privatisation operations in India (Aircel) and Indonesia (PT Natrindo). “There’s less risk now … and less (high) growth,” says an analyst. No one however rules out a possible injection of these assets down the road, when things start to turn around.

The deal in a nutshell – Maxis is offering 2.25bil shares or 30% of its existing issued and paid up capital totalling 7.5 billion shares.

“This is the country’s largest IPO ... by a long shot,” says a banker excitedly, no doubt, rubbing his hands in glee.

Once the IPO is completed, Maxis Corp Bhd’s (MCB) stake in Maxis Bhd would be slashed to 70%. Tycoon T. Ananda Krishnan controls 75% of MCB while the remaining is held by Saudi Telecom Company.

The exercise is expected to raise conservatively over US$3bil. But as it does not involve the issue of new shares, the funds will not go to the company but instead, its shareholders who are trimming their stakes and who need to fund the Indian and Indonesian operations.

“The company now doesn’t need the money. Five years ago, when it was listed, it needed funds to build up. It is now mature and has a free solid cash flow of over RM2.5bil per year. Infact, the restructuring element was included to add the element of debt and so, it has taken a debt of RM5bil. If there’s no debt, it is not an ideal capitalisation structure,” says a source close to the company. (Pre-listing, Maxis will acquire the Malaysian mobile operations from MCB, owing RM5bil to MCB in the process, which will be raised through long-term debt)

Tidy retail portion

According to the draft prospectus, the retail portion will get 2.33% or 174.795 million shares while 27.67% or 2.075 billion shares has been allocated for institutional investors, both local and foreign.

At first glance, the retail allocation appears disappointingly small, especially so against the size of the total offering. Upon closer examination, it’s even smaller. After reserving shares for privileged Maxis customers, dealers, distributors, eligible employees and directors, only 1.50% or 112.500 million of the existing shares is open to public application.

Why is that?

“There is always a risk if the retail size is too big. In terms of value, it is still substantial. It depends on what the market can actually take and the retail risk appetite,” says a source close to the deal. Also, he points out, with retail investors, there is always the “dumping risk.”

“Retail investors may pick up the shares but they may not hold on to them long enough. If the portion is huge, then there is no support for the share price. In any case, institutional investors include unit trust companies ... they are retail too except there is lower risk of dumping,” he says.

“Times may be better now but it is still impossible to time the IPOs. We want Maxis IPO to be a success. For that, the rule of thumb should be a (retail) subscription rate of not less than 2 times preferably. Let’s not forget that if it’s successful, it would mean a re-rating for the entire Malaysian market,” he adds.

One industry analyst says Maxis should have no problems wooing retail investment this time around, not least because of the IPO drought and more so, because of its much-revered blue chip status with a whopping market value exceeding RM40bil and its promise of a generous dividend payout ratio of 75% of earnings.

“With the size, profitability and yield angle, we believe the lure of this large cap is obvious,” says Affin Research’s analyst Kevin Low.

A cheerleader in PM

The “high profile listing”, says foreign research house JP Morgan, serves as a good case in point for Prime Minister Datuk Seri Najib Tun Razak’s reform measures, particularly in relation to the changes on bumiputra equity ownership for new listings on the equity market.

In June this year, as a follow up to a slew of liberalisation measures announced earlier, Najib scrapped the 30% bumiputra equity quota for Malaysian firms seeking listings, which formed the cornerstone of the New Economic Policy (NEP). In its place, a new rule was introduced; Malaysian companies seeking a listing on Bursa Malaysia are required to offer half of the public spread requirement of 25% (meaning 12.5% of share base) to bumiputras.

“Since the announcement, some aspects were still not clear. For example, if the public spread was more than 25%, say for example 30%, should the company allocate 12.5% or 15% to bumiputras,” says an observer.

The Maxis deal, advised by none other than CIMB Group led by Datuk Seri Nazir Razak, the Prime Minister’s brother, provides the clarity.

Maxis is offering for sale 30% of its shares; of the retail offering of 1.5%, 1% or two thirds has been set aside for bumiputra investors while of the institutional portion, 11.50% or over 40% of the institutional allocation is to be placed to bumputra institutional and selected investors approved by Miti.

“This means, regardless of the public spread (whether its 25% or more), 12.5% of the paid-up capital needs to be reserved for Bumiputera investors,” says the observer.

Evidently, Najib is a keen cheerleader for the re-listing of Maxis. In July, he had asked Maxis to re-list on Bursa Malaysia to increase the market’s liquidity and attract investors. Many were surprised when the premier made that “commercial request” but truth is, by then, there was already a plan being mooted towards this end.

Undeniably, Najib’s public support of Maxis’ listing augurs pretty well for the telco. “We expect the government administration to maintain a relatively “conducive” environment for the market in the run-up to the IPO, which may include possible coincident positive news flow, such as positive vibes from the 2010 Budget in October; announcements on the award of some key infrastructure projects to contractors, highlighting the pump priming agenda; and encouraging sound-bites on a stronger 4Q09 economic outlook,” says JP Morgan.

Clearly, Maxis CEO Sandip Das, who joined the company five months before it was taken private, has his work cut out for him. His business compass will largely point to one direction – to retain the leadership position Maxis has long basked in, as the country’s largest cellular operator.

The Malaysian mobile market, specifically the voice segment, offers limited opportunities given the high mobile penetration rate of 97% as at end 2008. Also, competition is expected to be nothing less than brutal.

“Competition will intensify as mobile operators try to outdo each other to acquire and retain subcribers,” says RAM, although it expects this to largely manifest in a three-way fight among the incumbents – Maxis, Celcom and DiGi. “The new entrants will unlikely pose a serious threat,” it adds.

Top on his list will be beefing up subscriber numbers and value added usage.

“Growth is still prevalent for value added services. Broadband demand is rising. Maxis already has the customers, network, cash flow and capex in place. It has the ability to go out there and have new products and services with higher ARPU. The real advantage is 3G. That’s what it’s looking at. It has over 11 million subscribers and its sister company Astro is hooked up to 50% of homes. It’s a natural content partner. There are tremendous opportunities,” says a source.

For the first half of financial year 2009, Maxis chalked up RM1.1bil in net profit on the back of RM4.2bil sales.

To put things in perspective, Maxis’ 1H09 net profit was almost equivalent to the combined core net earnings of Axiata, DiGi and TM, which reported 1H09 net earnings of RM323mil, RM510mil and RM279mil respectively.

As a comparison, back in 2007, Maxis’s domestic earnings was equivalent to RM1.98bil vs DiGi’s RM1.06 bil and the back then Telekom Malaysia’s RM2.49bil whose earnings have shrunk considerably since,” says Affin’s Low.

But it’s not all rosy. OSK Research points out that Maxis’ overall market share has continued to decline, from a high of 42% in 2Q07 with both prepaid and postpaid share narrowing to 38.5% and 45% from 40% and 50.3% respectively. The analyst expects Maxis’ revenue and subscriber market share to face some serious challenge, no thanks to a highly saturated mobile market and intensifying competition.

“It remains to be seen if Maxis will be nimble enough to pre-empt its subscribers’ needs through more innovative and quality offerings, thus retaining its share of the post-paid subscriber base,” says RAM.

From public to private to public again

There is also the concern of further erosion in average revenue per user (ARPU) – a figure telco owners are constantly monitoring as it is a benchmark for growth, or otherwise. Blended ARPU for FY07 was RM64 and, a year later, at RM58.60. For the first half of FY09 it was RM54.20 versus first-half FY08’s RM59.10. Churn rates – rates at which customrers leave for a competitor – have also risen from 3.3% in the first half FY08 to 4.2% in the same FY09 period.

Could Maxis have spared itself the rigmarole of privatizing, only to relist again two years later? Could it have worked out a plan, not unlike what its shareholders are currently toying with doing for Astro, to sell off its overseas operations to existing major shareholders and retain the domestic operations under the listed entity. After all, wasn’t the whole idea to spare the public from the cost burden of the overseas operations?

“It’s a fair question. There is value in India and it is still growing. But you wouldn’t have gotten the values there two years ago. It was getting choppy at that point,” says the company source.

“Look, the company has always sat on the same side of the table as minority shareholders. When it got involved in the Indian operations, it didn’t want to allow the public to pay for that gamble. Instead, the Saudis came in to diversify the controlling shareholder’s risk. It took the cost burden away from the public and prevented the underlying cash business from being eroded,” says a company source.

“For this exercise, the shareholders have taken the international operations out because at this point, it is not attractive and needs huge cash requirements and ongoing losses. The shareholders have spent over US$3bil-US$4bil on the Indian operations and expect to fork out a further US$5bil in the next three years.

“We have taken the overseas story away,” says a company source.

Given Maxis’ robust cash flow (averaging RM1.6bil to RM2bil over the next two years), steady business profile, sweet promise of healthy dividends, pole position in the market and impressive management and a track record that has long pleased governance hawks, it’s a story that needs no hard sell.

Going public, which Maxis has no doubt discovered, has its advantages.

More News

Business Links

Latest Jobs from Star-Jobs

Latest from StarProperty