This article first appeared in The Edge Financial Daily on June 21, 2017 - June 27, 2017

Maxis Bhd
(June 20, RM5.62)
Maintain neutral with an unchanged target price of RM5.90: Maxis Bhd has proposed to undertake a private placement of 300 million new shares to investors to be identified via a book-building exercise carried out on Monday.

This doesn’t come as a surprise given Maxis’ high gearing level and heavier capital expenditure in view of the rising spectrum cost.

We believe the timing of this fundraising exercise is ideal as Maxis’ earnings remain resilient at this juncture due to its premium branding and superior network infrastructure relative to peers.

This, however, may not sustain moving into 2018, as we expect peers to improve on product offering and quality of services once they roll out additional spectrum under the 900/1800MHz bands.

The 300 million new share issuance represents about 4% of the existing share base and the issue price is determined by way of book-building at no more than 10% discount to the volume weighted average market price (VWAP) for the last five market days.

The VWAP price between June 9 and last Friday was RM6.0819. Hence, the indicative issue price should be no lower than RM5.47 a share, suggesting gross proceeds of at least RM1.64 billion. The proceeds will be utilised for the repayment of borrowings.

Post share placement exercise, our financial year ending Dec 31, 2017 (FY17) to FY19 earnings per share is expected to be diluted by about 3.8% due to the increase in share base while gross debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) to improve to about two times from 2.4 times.

Given a gross debt to Ebitda of 2.4 times, there is little room for Maxis to leverage up to fund future expansion or capital expenditure (capex). We believe the sector would incur higher capex for the coming years due to possible repricing and spectrum reallocation under the 700MHz, 2100MHz and 2600MHz bands.

Therefore, we reckon that it is necessary for Maxis to embark on this equity fundraising exercise to strengthen its balance sheet. Assuming the entire proceeds are used to pare down existing borrowings, Maxis’ gross debt to Ebitda is estimated to improve to about two times. — PublicInvest Research, June 20