About Maxis ...

MAXIS
1. Why List Maxis After Delisted On 2007?;
2. The Prelisting Restructuring Of Maxis & Binariang;
3. What Is The Upside For Ananda and Binariang After Maxis Bhd Is Relisted?;
4. The Question Is, Will Maxis Be Able To List Rm5 a Share Or More?;
5. The New Versus Old Maxis;
6. Given Tougher Market Conditions, The Question Is. What Kind Of Growth Can Maxis Deliver
In The Current (2009) Environment?
7. Valuations Of Maxis;
8. Maxis Vs Axiata & DIGI

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 list 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 (2009) 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.

Maxis Vs Axiata & DIGI …

One of the key investment merits for Maxis was the strong cash flow from its domestic operations, hence, the ability to sustain good dividends going forward (targeted payout of 75%). Maxis provided investors with a strong alternative as an income stock, though the local cellular telephony space was “close to saturation (over 100% penetration)”.

Maxis's re-entry into the public domain has raised speculation about its impact on Axiata and DiGi.

Maxis has 11.4 million subscribers representing about 40% of the estimated 28.5 million mobile subscriptions in Malaysia. MCB announced it would sell a 30% stake comprising 2.25 billion shares in Maxis Bhd, which consolidates its Malaysian operations. Of that, 2.075 billion shares will be offered to institutions and the remaining 174.79 million shares to the public and customers. After the corporate exercise, MCB would hold 5.25 billion shares, representing 70% of Maxis’ paid-up capital.

Based on the announcement, this would see members of the public owning a very small stake in the company.

As at June 30, 2009, Maxis had deposits, cash and bank balances of RM1.88 billion. For the first half ended June 30, 2009, it posted a net profit of RM1.41 billion.

Some believe there may be a realignment and shifting of portfolio in the sector upon Maxis’ re-entry. Nonetheless, Axiata — when compared with Maxis — was a more compelling longer-term exposure given its strong regional growth prospects which would provide more superior earnings upside. Meanwhile Maxis’ relisting would impact DiGi more than Axiata due to the former’s much lower trading liquidity and market capitalisation.

The key factor that the major shareholders need to take into consideration was the listing pitch, given that Maxis was once perceived to be a darling stock with strong regional prospects and good dividend yields.

Based on shareholding data from individual companies, foreign shareholding in telcos was at an all-time low in June 2009 despite the improved market appetite since March 2009. This was because Malaysian telecom stocks are perceived to be trading at a premium relative to their peers in Indonesia, Singapore and Thailand.

Telekom Malaysia’s foreign shareholding fell from 15.9% at the end of 2008 to 10.6% at end-June 2009 while DiGi’s foreign shareholding (excluding Telenor) tumbled from 15% to 11% during the same period. It is believed Axiata saw a slight expansion in foreign interest following the increased weightage under the new FBM KLCI after hitting a low of 8.4% in June 2009.
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The top reasons for investing in soon-to-be-listed telecommunications company (telco) Maxis Bhd (Maxis Malaysia) are its potentially high-dividend yield, dominant share of the local mobile market and superior margins.

Maxis Malaysia, the year's most anticipated initial public offering (IPO), is largely expected to be listed in November 2009 with a go-to-market valuation of around RM37 billion to RM40 billion.

Maxis Malaysia's key investment merits are its target dividend yield of over 5 per cent on the back of the domestic operation's strong and steady cashflow, dominant share of the domestic mobile market and superior margins.

The listed entity, which will comprise only Maxis Communication Bhd's domestic operations, could have a negative impact on other listed telcos such as DiGi.Com Bhd and Telekom Malaysia Bhd (TM). It is believed that Maxis Malaysia's "significantly" higher profile, market capitalisation and trading liquidity, investors are likely to switch to it from DiGi.Com and, to a certain extent, TM.

Industry observers believe the re-listing of Maxis will be negative for DiGi.Com given (the latter's) smaller share liquidity and market capitalisation and Maxis' relatively more superior EBITDA (earnings before interest, tax, depreciation and amortisation) margin and dividend payout potential.

Meanwhile, as Maxis will be relisted without its overseas operations, it is not seen as a direct threat to Axiata. Axiata provides a more compelling longer-term investment proposition given its regional footprint in 10 countries.

MAXIS deserves premium valuation over DiGi (PE multiple of 16 times) but a discount to TM's fixed-line and broadband monopoly (20 times).

Expecting Maxis to be included as a component stock of the FBM KLCI, which would be a boon for index-linked funds.