Maxis puts Malaysia back on the map

Asia''s largest IPO of 2002 surprises everyone.

Despite its large size and relatively steep price tag, an $804 million IPO for the country's largest cellular operator, Maxis Communications, has made a very convincing showing with both domestic and international investors. Until Maxis, it took extremely compelling valuations to draw international investors back to South East Asia's beleaguered IPO markets and in this instance, many outside observers thought that domestic investors were going to be the mainstay of the order book. However, a late surge of momentum two to three days before pricing on Saturday overturned everyone's expectations and in the end, the international book closed five times oversubscribed and the domestic institutional book just over four times.

With ABN AMRO Rothschild as global co-ordinator and Goldman Sachs and ING Barings as joint bookrunners, the international tranche comprised a total of 314 million shares, with CIMB and RHB Sakura running a domestic institutional tranche of 106 million shares and domestic retail tranche of 232 million shares.

The two institutional tranches were priced at M$4.85, the mid-point of an M$4.40 to M$5.33 range, while retail investors will receive their shares at M$4.36, a 10% discount. Of the 652 million shares sold, 241 million are secondary shares and 411 million primary shares, with a 63%/37% institutional and retail split and 52%/48% domestic and international split.

In the international tranche, there are also two co-leads, Cazenove and Salomon Smith Barney, with a third, Credit Suisse First Boston, withdrawing a day before pricing.

Upon scheduled listing on July 8, there will be a 26.7% free float, with controlling shareholder Ananda Krishnan owning 38.7% through his holdings in Usaha Tegas and Maxis Holdings. A further 24.4% is held by Bumiputra shareholders.

With a market capitalization of $3.12 billion, Maxis should now enter the outer end of Malaysia's top 10 companies by market capitalization. And as Matthew Kirkby, ABN AMRO's head of Asian equity capital markets comments, "This has been the largest IPO from Malaysia since the financial crisis. It's a great testament to the company to have achieved what it has in difficult global markets for telco stocks."

Of the roughly 250 investors in the international order book, just under 10 are said to have placed orders for more than $50 million and market speculation has it that one came in for $150 million. Because a couple of these anchor orders also came in right at the beginning of roadshows, the leads say they felt confident about the deal's prospects from the outset.

"This deal went well from the word go," says one observer. "Since there were a couple of big orders in hand with price sensitivity around the M$4.80 mark, it was clear the deal was unlikely to price below this level. Then when there was a late surge of orders just before pricing, it became possible to get some of the key accounts up to M$4.85."

"But," he adds, "it was decided not to push pricing beyond this level because there are three weeks until the company actually lists and markets are pretty shocking at the moment. Asian telco wireless stocks lost on average 5% to 10% over the course of roadshows and the way things stand, they could easily lose the same amount again before Maxis starts to trade."

Given that many commentators thought Maxis's pricing expectations were aggressive even before roadshows, it says a lot about management's persuasive abilities to maintain indicative pricing as markets fell around them. At the end of May, for example, comparable Asian telcos were trading on an average EV/EBITDA level of 6.7 times 2002 earnings. By the end of roadshows, they had dropped to 6.3 times, while Maxis priced at 6.6 times.

"The company is probably fairly valued on an EV/EBITDA basis," one banker concedes. "But there is upside because of the IPO discount that was applied. Most houses have a fair value assumption around the 7.5 times level."

On a P/E basis, Maxis still appears relatively cheap to comparables, because its "E" is supported by the company's huge cash flow generating abilities and limited capex, as it does not have a costly fixed line network to maintain (yet). On this basis, Maxis priced at 13.5 times 2002 earnings, against a regional average around the 16 to 17 times level and 18 to 20 times level for Malaysia's big blue chips.

For many outside observers, one of the most interesting aspects of the deal was the issue of whether it was new money being invested, or whether there were simply a lot of switches out of other stocks. The latter argument is given some credence by recent trading on the Kuala Lumpur Stock Exchange. Since hitting a high of 816.94 on April 23, the KLCI had fallen off to a 696.09 level by Friday and all the listed telco stocks, with the exception of TRI, ended the week down.

However, both syndicate officials and fund managers note the participation of a large number of global funds, which had been waiting for Maxis to re-weight their Malaysian portfolios. Bankers estimate that pre-Maxis many funds were underweight the MSCI by about 20% to 30%. Preliminary breakdowns show that by geography, the international book was split 55% Asia, 30% Europe and 15% US. By investor type it was split roughly 50% regional funds, 30% Malaysia dedicated funds and 20% telco funds.

Some 80% of all investors are said to have been tier one funds and with 250 accounts vying for only $402 million in the international tranche, the allocation process was said to have been lengthy and fraught.

But as Singapore-based fund manager adds, "We're probably one of the odd funds that didn't participate. We saw that a lot of top down global funds were looking to re-weight and bought Maxis as a proxy for Malaysia. But we're already well positioned in a number of stocks and saw no need to participate in what we thought looked like a very expensive proxy. Ananda Krishnan has won a good premium price for his company."

Fund managers, analysts and Malaysian experts generally find it difficult to think of anything negative to say about the Usaha Tegas group and particularly Maxis. The company's corporate governance track record and its founder's ability to develop value-added businesses have long stood out in a country where neither has seemed prominent in recent years.

"Investors were very impressed with the business model developed by Maxis," says one banker. "Where other cellular companies have sacrificed profits in a race to build market share, Maxis has set itself up a premium brand and still maintains a dominant position."

With the highest market share at the end of 2001 (30%), Maxis also has the highest average revenue per subscriber ($29), the lowest churn rate (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.

However, as the Singaporean fund manager queries, "The question we kept asking ourselves was whether this is as good as it gets. There's no doubt that Maxis is a fantastic company and it has done very well in a relatively complacent domestic telecom market. But the competitive landscape is changing very quickly, penetration rates are already high and we doubt whether the company can keep these growth rates up."

On a wider level, the success flotation of Maxis should give the whole Malaysian market a lift. Mark Machin, co-head of Asian ECM at Goldman Sachs says, "A lot of investors have been waiting to put money to work in Malaysia again and this deal should give them confidence that there's wide underlying support for the market. We always knew that investors were likely to be receptive to Malaysia, but no-one quite realised just how robust that reception would be. We did not hear one question about country risk at all."

With just one deal, the amount of international equity issuance from Malaysia over the past three years has effectively doubled. Prior to Maxis, only $825 million had been raised from a total of five deals. Many now hope that Maxis's success will give a boost to PLUS, which is following with a $650 million deal via JPMorgan.

And as Paul Kelly, ING Barings co-head of Asian ECM concludes, "Maxis is a fairly unique proposition and there are not many with its strong fundamentals. But this has been a great result for the company, a great result for Malaysia and a great result for South East Asia too. It's been a difficult market for straight equity in Asia this year. Let's hope this marks a turning point."