Maxis's record-size IPO sees heavy cornerstone participation

Maxis Berhad will kick off the bookbuilding for its initial public offering today, having already secured the participation of four cornerstone investors, who will buy a combined $950 million worth of shares, or up to 29.7% of the deal depending on the price. The heavy cornerstone involvement -- three domestic pension funds and Fidelity -- will boost the chances that Malaysia's largest IPO ever will be a success.

The Malaysian mobile operator, which is a spin-off from Maxis Communications (MCB), is seeking to raise between M$10.8 billion and M$12.4 billion ($3.2 billion to $3.6 billion) and is expected to list on the Malaysian stock exchange in mid-November.

Maxis Communications was taken private by its controlling shareholder a little more than two years ago to allow the company to use the cashflow from the mature domestic business to fund its overseas expansion into India and Indonesia without having to answer to shareholders who might have preferred the money to be used for larger dividend payouts. Attempting to justify the buyout, Maxis notes in the current listing document that the principal shareholder at the time, Ananda Krishnan-controlled Binariang, believed that the overseas expansion would "significantly change" the financial and risk profiles of MCB due to uncertainties surrounding the investment and regulatory environments in new markets, as well as the substantial capital expenditure required.

That situation has not changed. However, the Maxis that now returns to the Malaysian stock market comprises only the domestic telecom business -- the overseas operations will remain within Maxis Communication, which is still in private hands.

As the largest mobile operator in Malaysia -- it has a 46% share of the post-paid market and 38% of the pre-paid subscriptions -- Maxis is generating a strong and steady cashflow, which means it has the ability to pay high dividends. Indeed, bankers involved in the deal note that the company has attracted attention among potential investors primarily as a yield play and say a lot of the valuation talk so far has centred around the potential dividend yield.

According to the listing prospectus, Maxis is promising to pay out 75% of its annual earnings as dividends. However, that commitment will act only as a floor and analysts argue that the payout ratio is likely to be higher than that -- some say it could be as high as 100% even.

"Maxis is lowly geared so it has the ability to leverage up and use the proceeds to increase its payouts," one banker said.

Based on a 75% payout ratio and last year's net profit of M$2.4 billion ($712 million), the IPO price range translates into a dividend yield of between 4.4% and 5%. The free cashflow yield is estimated to be in the 6%-7% range.

Maxis has set the price range at M$4.80 to M$5.50 per share. The upper end of that range is equal to the earlier announced maximum price attached to the Bumiputra tranche -- a portion of the deal that will be set aside for indigenous Malaysian investors.

The price range values Maxis at a 2010 enterprise value-to-Ebitda multiple between 8.5 and 9.6 and a 2010 price-to-earnings multiple ranging from 14.5 to 16.5, based on the bookrunner consensus.

On a P/E basis, this puts Maxis largely in line with its key comparable, DiGi, which is the third largest mobile operator in Malaysia and currently trades at 15.4 times forward earnings and at a slight premium to Axiata, the owner of number two player Celcom, which is trading at 14.5 times next year's earnings. Axiata is viewed as a less perfect comparable given that it also has mobile operations outside Malaysia, in Indonesia, Cambodia, Mauritius, Thailand, Sri Lanka, Bangladesh, Pakistan, Iran and Singapore. DiGi's businesses are all in Malaysia.

Because of its greater market share, analysts argue that Maxis should trade at a premium to both DiGi and Axiata, which indeed it did when it was listed as MCB, and the fact that it is being offered at a flat to only a slightly higher valuation, suggests that investors may be asking for a bit of an IPO discount. Of course, the maximum price on the Bumiputra tranche is also holding back on the potential valuation premium.

On an EV/Ebitda basis though, Maxis is looking a little more pricy relative to the comps. Its implied multiple of 8.5 to 9.6 compares with 7.3 times for DiGi and 7 times for Axiata, which was formerly known as TM International. The latter two offer a free cashflow yield of 6.8% and 4.5% respectively.

Maxis will be selling 30% of the company, or 2.25 billion shares, all of which are existing shares sold by MCB. As reported earlier, about 7.8% of the deal will be earmarked for retail investors. However, the Bumiputra tranche will be only about one-third of the deal (it was earlier indicated at up to 50%) as some of the cornerstone investors count as Bumiputras as well.

The remaining one-third or so will be split between other domestic institutions and international investors, which suggests there is likely to be upward pressure on price as investors fight for a piece of the action. Aside from being attractive from a yield perspective, Maxis will also be a bell-weather stock in the Malaysian market and is expected to go into all the benchmark indices, meaning investors who follow Malaysia or the telecom sector will have to buy it.

The implied deal size is well above MCB's $803 million IPO in 2002, which is widely viewed as the country's largest listing to date. Petronas Gas raised $1.1 billion from an IPO in 1995, according to Dealogic, but the different exchange rate back then makes it hard to compare, bankers say. Outside the China A-share market, Maxis will also be the largest IPO in Asia this year, ahead of the $2.35 billion H-share portion of Metallurgical Corporation of China's dual listing in Hong Kong and Shanghai.

Maxis will kick-off the investor roadshow with a luncheon in Hong Kong today and the deal is scheduled to price on November 11. CIMB, Credit Suisse and Goldman Sachs are joint global coordinators and joint bookrunners for the offering, with J.P. Morgan, Nomura and UBS joining them at the bookrunner level.