The Malaysian government is about to receive one of its biggest tests of international investor confidence since the Asian crisis as Maxis and PLUS seek to concurrently raise up to $1.57 billion in new equity. For both companies the challenge is to re-launch the Malaysian equity market without having to make the kind of pricing sacrifices that have so far tempted international investors back to South East Asia.
In what all concerned are hoping will mark a true watershed, the two companies are seeking to move the market forwards both in terms of the amount of paper that can be absorbed and the valuations that can be achieved. Where the former is concerned, the Malaysian market has seen only $825 million of international equity and equity-linked issuance since the beginning of 2000 from a total of five companies spanning Digi.com at one end and TRI at the other.
Since the end of 2001 companies such as Thailand's PTT, Indonesia's PT Telkom and TRI have also successfully encouraged investors to re-weight their South East Asian portfolios by offering compelling valuations. By contrast Maxis and PLUS have both been pre-marketing fairly punchy valuations in the hope that investors will regard them as must holds in a country where corporate governance and transparency have become the new government watchwords.
According to the valuations assigned by the respective lead managers of the two deals, both companies will reside in the top ten by market capitalisation post IPO, with PLUS (roughly $3.42 billion cap) coming in at number seven behind Tenaga, Maybank, Telekom Malaysia, Petronas Gas, and Public Bank, while Maxis ($3.2 billion) should sit at number nine sandwiched between MISC and Sime Darby.
Year-to-date, the Malaysian equity market has been one of the region's better performers closing yesterday (Tuesday) up 12.846%, but its weighting in the MSCI Far East Free ex-Japan Index is still only about 6.6%. Most of the big accounts are also thought to be underweight the country weighting to the tune of up to 50% of this amount and key will be whether they have been waiting for Maxis and PLUS to give them the kind of large liquid benchmark stocks in which they feel comfortable about re-positioning themselves.
Maxis is already mid-way through pre-marketing its deal and roadshows are scheduled to formally start on either Saturday May 25 in Kuala Lumpur or Monday May 27. Following three-week roadshows spanning Asia, Europe and the US, pricing is set for Monday June 17, with listing about three weeks later. Meanwhile, the government also wants to make sure that its partial privatisation of PLUS is completed ahead of the summer break and the deal began pre-marketing yesterday. Roadshows are scheduled to begin 10 days later than Maxis on Friday June 7, with pricing on June 25 and listing on July 11.
Of the total 652 million shares on offer, 241 million will comprise secondary shares and 411 million primary shares. The total offering has a 63%/37% institutional/retail split, with 15% to 20% of the retail tranche being allocated to Bumiputras and the remainder to domestic retail, Maxis subscribers, dealers and employees.
About 46% to 50% of the total offering is expected to be placed internationally under the lead management of ABN AMRO, Goldman Sachs and ING Barings, with Casenove, CSFB and Salomon as co-leads. The domestic offering will be led by CIMB and Rashid Hussain.
Under a domestic filing, an indicative range of M$4.5 to M$5 has been set, although this is likely to be adjusted slightly after roadshows get underway. Retail investors will also be offered shares at a minimum discount of 10% to institutional via an eight-day offering period that will run concurrent to the international bookbuild.
The deal will represent 27% of the company s issued share capital and at the top end of the range should raise M$3.28 billion ($864 million). According to investors, the leads are working on an average fair value assumption for the company of M$15.2 billion ($4 billion) and have applied a 20% discount in line with the trading levels of regional competitors to arrive at a discount to DCF valuation of M$12.16 billion ($3.2 billion).
This will pitch the deal on an EV/EBITDA ratio of just over seven times 2002 earnings at the top end of the indicative range and just over six times at the bottom. On a P/E basis, Maxis will also be pitched between about 13 to 14.5 times 2002 earnings and on a revenue per subscriber basis at $1,391 based on end 2001 subscribers of 2.3 million.
The most expensive multiple on a regional and domestic basis is revenue per subscriber given that TRI is currently trading at $1,000 per December 2001 subscribers and a regional comparable such as Thailand's AIS is trading at a $621 level. Against EV/EBITDA comparables, Maxis is being marketed almost flat to the regional average of 6.7 times (using only Chinese, Thai and Filipino cellular companies), but offers better value against domestic comps such as DIGI.com, currently trading on at 8.3 level and the much-lesser rated TRI at a 5.5 level.
On a P/E basis, Maxis also compares favourably to domestic and regional comparables, which do not have its cash generating abilities and tend to trade at much more inflated levels. TRI, for example, is currently trading at 16 times 2002 earnings, while the regional average (again using China, Thailand and the Philippines) comes out at 17 times.
One of Malaysia's most successful tycoons, Ananda Krishnan currently controls just over 50% of Maxis via holdings through Usaha Tegas and Maxis Holdings. His track record in building a business empire based on value-added businesses, stand-alone management and transparency is expected to be one of key selling points of the deal.
As one Malaysian specialist comments, "This man has helped build a high-class company which deserves to be accorded a premium. He has consistently shown an ability to spot value and build solid businesses."
Until Telekom Malaysia moved to take control of TRI, Maxis was the industry leader in the Malaysian cellular sector with a 30% market share at the end of 2001. The company also has the highest average revenue per subscriber (ARPU) - $29 - the lowest churn rate - roughly 2% - and has been one of the fastest growing companies in the country - EBITDA growth in excess of 35% per annum since the Asian crisis.
Having never had to invest in a costly fixed-line network, Maxis also generates significant free cash flow and after the IPO is expected to be in a new cash position, which will allow it to pay a dividend subject to no further M&A activity.
But as a number of analysts point out, the Malaysian telecommunications industry has entered a period of uncertainty and consolidation which will pose Maxis a number of challenges. Chief of these results from the takeover of TRI by Telekom Malaysia and rampant speculation that Maxis will purchase Time Dotcom to create a second national integrated telco with fixed line and cellular operations, plus a valuable fibre optic network that will allow it to grow its data services business.
Analysts further believe that a merger makes sense since Maxis has recently had bandwidth problems as it has the lowest domestic allocation of spectrum (2 x 10 MHz). A merger would allow the company to combine its GSM900 network with Time's GSM1800 to create a dual band network. However, having encountered congestion towards the latter half of 2001, the company has since responded by dividing the cell size in each frequency to increase capacity and analysts say that this should see it through until 2005 based on the company's forecasted growth rates.
Other challenges are posed by the allocation of three 3G licenses later this year in a country with four players and a high penetration rate relative to other emerging market comparables - at 31% the country has the fifth highest penetration rate in the region, while countries like Thailand currently stand at 15% and at the bottom of the scale, Indonesia on 3%.
Under the lead management of JPMorgan as international bookrunner and RHB Sakura as domestic lead, the toll road operator of the government-owned UEM group is planning to offer 830 million shares, with the potential to upsize the deal to 930 million subject to demand.
At the lesser amount this will represent 16.6% of the company's issued share capital and at the higher amount 19%. Similar to Maxis, there is a 64%/36% institutional/retail split, with CLSA and Credit Suisse First Boston acting as co-leads for the international books and ING Barings as co-manager.
According to investors, PLUS or Projek Lebuhraya Utara Selatan as it is otherwise known, has been accorded a DCF valuation of M$2.96 per share, which will give the company a fair value of M$14.8 billion ($3.89 billion). Although no indicative price range has yet been set, investors say that they have been provisionally canvassed around an M$2.60 range, which would price the deal at a 12.2% discount to DCF. This also means that it will raise between M$2.158 billion ($568 million) taking 830 million shares and M$2.418 billion ($637 million) taking 930 million shares.
One of the chief problems in valuing PLUS is that there are no true regional comparables. And although investors may initially look to the Chinese toll roads listed in Hong Kong, some argue that the comparison is not a valid one. This is chiefly because unlike China, tariffs have fixed over the entire life of the 30-year concession which expires in 2030 and the 847.7km road dominates Malaysia in a way that no individual road could ever hope to do in China.
As one observer notes, "Tariff increases have been gazetted to increase by 10% every three-year for the entire period of the concession and if the government decides that it wants to change them then it has to compensate the company accordingly. In China, investors appear to have priced in a lot more regulatory uncertainty and political risk to the share prices of the listed operators which trade at a 10% to 20% discount to DCF.
"By contrast," he adds, "some of the toll roads in Australia, for example, can trade at a premium of about 5% to DCF."
The lead managers seem likely to argue that PLUS offers the twin attractions of a defensive utility style play based on its predictable cash flows, with an added kicker tied to GDP growth.
On a global basis, observers say that traffic on mature roads tends to increase at a rate of 4% to 7% per annum equating to a 1.2 to 1.5 times multiple to GDP. Since it opened in 1994, PLUS has averaged annual traffic increases of 7.5% per annum and forecasts that the figure will rise to just under 8% going forwards.
One of the chief attractions of the stock is that its steady cash flows and lack of capex means that it will be able to offer investors regular dividends. The company has said that it will distribute all available free cash to shareholders and will only invest in new projects if they are value-added. Consequently, it is estimated that PLUS will generate a 3% dividend yield from 2003.
Because it will only require roughly 10% of revenue to maintain current operations and limited capex, investors say that they have also been shown EPS growth of 17% per annum over the coming three-years, which compares favourably to other Malaysian comps such as Petronas Gas on 15% and Maybank further up the scale on 38%.
And despite the debt restructuring at PLUS triggered by the government-forced overhaul of the Renong group, which had previously overloaded debt onto its cash cow, net debt to equity post IPO will stand at only 30%.