MobileOne completes pre-marketing

China Telecom''s travails gives lead managers pause for thought as investor pre-marketing wraps up in Singapore.

An IPO for Singapore's second largest cellular operator, MobileOne, is likely to be filed with the Monetary Authority of Singapore today (Wednesday) as lead managers ABN AMRO and UBS Warburg complete the final few days of investor pre-marketing.

The two have already completed a week of pre-marketing in the US and Europe before moving to Asia at the beginning of this week. Formal roadshows are scheduled to start in Hong Kong on Monday (November 11), with pricing of the institutional book taking place on November 25, followed by a week for the Singapore retail offering and then listing in early December.

MobileOne faces a market where institutional investors hold virtually all the pricing advantages, large deals are exceptionally difficult to place and telecom stocks are completely out of favour. As such non-syndicate bankers are watching with interest to see whether the company tries to maintain its ambitious pricing targets when the indicative range is formally announced on Monday.

Given that the sale is all vendor shares, there has always been pressure to maximise proceeds. However, observers say pre-marketing has given the four selling shareholders - Keppel T&T, Singapore Press Holdings (SPH), PCCW and Cable & Wireless - a very realistic view of what can be achieved in the current market environment.

So far, investors have been canvassed on the basis of an S$970 million ($500 million) to S$1.2 billion ($750 million) IPO. Syndicate banks have assigned DCF valuations ranging from S$1.6 billion to S$2.2 billion. Based on the mid-point of this range (S$1.9 billion) and assumption that the company will sell 70% of its equity, pricing equates to a DCF discount of roughly 30% to 10%.

The four shareholders have said they will sell a minimum of 51% and hope to sell up to 70%, all on a pro rata basis. Pre-IPO, Keppel and SPH both hold 35%, with PCCW and Cable & Wireless on 15% each. This will result in a prospective sale of 525 million to 735 million shares.

Current pricing is said to equate to P/E ratio of roughly nine to 11 times 2003 earnings and EV/EBITDA ratio spanning six times earnings. Analysts believe that both these multiples and the proposed DCF discount are aggressive given the current trading level of Asian comps.

According to one European bank, cellular operators from non-Japan Asia currently average an EV/EBITDA ratio of 4.3 times 2003 earnings and P/E ratio of 10.7 times 2003 earnings. The same bank also calculates that the average discount to DCF stands around the 40% mark.

However, once the lesser-developed countries are stripped out, MobileOne's valuation becomes slightly more compelling against Korean comparables and its listed domestic competitor SingTel, the city state's largest operator. The latter is said to be trading around 6.4 times 2003 EV/EBITDA and on a P/E ratio of 16.9 times 2003 earnings.

In terms of mobile penetration, Singapore ranks as the region's third highest after Taiwan and Hong Kong. In terms of ARPU it comes second to Korea.

With a total of 3.12 million mobile subscribers at the end of September, Singapore had a penetration rate of just over 76%. MobileOne holds a 35% market share and has an ARPU of S$64 per month. Analysts say this puts it below both of its domestic rivals, with Starhub on S$70 a month and SingTel S$75.

Most agree that mobile penetration in Singapore is reaching saturation point. For example, figures from domestic regulator Infocomm show that mobile subscribers have been growing by an average of 22,400 a month so far this year compared to 98,500 throughout 2001.

Like Korea, mobile data will underpin future growth and is said to have risen from 5% to 15% of MobileOne's revenues within the space of a year. "Singapore is the world's most active SMS market," says one observer. "MobileOne also has a young client base in the 19 to 30 range and this segment averages nine to 10 text messages a day."

All this means that with few obvious growth opportunities, MobileOne needs to attract investors with something else. As such it is offering a high dividend yield, and depending on final pricing, syndicate research estimates a 4% to 5% ratio. This is based on a pay-out ratio of 50% of 2003 net profits.

Observers believe the dividend is the deal's greatest selling point since only two other pure Asian cellular operators currently pay dividends (SK Telecom and SmarTone) and both yield under 1%. So too, the prospective yield beats both the Singaporean average (3.19%) and SingTel's 3.87%.

The second selling point is the possibility of realising potential upside from the sale of a strategic stake, which will result in a change of ownership. Just over a year ago, the selling shareholders attracted potential bids from Maxis and Telstra in the range of $1.2 billion, but dismissed them as too low. It has recently been reported that Telstra is actively reviewing the situation.

But in the current market environment, the deal's greatest handicap is its size. Even at the bottom end of the prospective range, it dwarfes all before it and will represent the country's largest IPO since SingTel's S$4 billion IPO of 1993.