Maxis planned to raise up to RM1.7b in a share offering to pay down debt and fund its future spectrum-assignment fees, expansion plans and growth strategy should the opportunities arise. The fund raising exercise will enhance its cash flow, liquidity, generate interest costs savings as well as improve its gearing level. All in, we made no changes to our FY17E/FY18E earnings forecasts for now, pending on the conclusion of the book-building exercise. Maintain MARKET PERFORM with unchanged DCF-driven target price at RM6.20 (WACC: 6.7%, TG: 1.5%).

Proposed fund raising via private placement. Maxis has proposed to place out 300m new Maxis shares (representing c.4% of the total share capital) to investors (to be identified) via book-building exercise. The new shares will be priced at between RM5.52-RM5.74 per share or equivalent to 2.2% to 6.1% discount to Maxis’ closing price of RM5.88 last Friday. Barring any unforeseen circumstances, the group expects the proposed private placement to be completed by the end of July 2017. We believe the indicative price range is fair as it is close to the street’s average target price of RM5.67, albeit being 7%-11% lower than our target price of RM6.20.

Rationales of the equity fund raising. Maxis believed the proposed private placement is currently the most appropriate means of equity fund-raising as: (i) shareholders have granted an approval to raise up to 10% of the total number of issued shares in last AGM, (ii) the bookbuilding process would allow efficient price discovery and competitive pricing based on investors’ demand, and (iii) enhancing the share liquidity.

Utilisation of the proceeds. While the actual amount of the proceeds from the proposed private placement has yet to be determined, Maxis is set to utilise the proceeds as follows; (i) for the repayment of borrowings and related incidental costs within 12 months, and (ii) to create financial flexibility for the Maxis group to fund future spectrum assignment fees, expansion plans and growth strategy should the opportunities arise.

Negligible financial impact. Maxis could potentially raise RM1.69b should the issue price of the placement shares set at RM5.63/share (the mid-price of the RM5.52-RM5.74 price range). For illustration purpose, assuming 50% of the gross proceeds is used to reduce its borrowings; the interest cost saving could raise our Maxis’ FY17E/FY18E core PATAMI by 0.8%/1.3%, respectively. Balancesheet-wise, the group’s net debt to EBITDA ratio is expected to lower to 1.6x by the end of FY17 (vs. 1.96x as of end 1Q17) post debt reduction. Our Maxis DCF-driven target price, meanwhile, will be reduced to RM6.00 (from RM6.20 currently) based on the enlarged share capital of 7.81b as compared to 7.51b currently.

Ample credit facilities still available via Sukuk Programme. To recap, Maxis has established an Unrated Islamic Medium Term Notes (Sukuk Murabahah Programme) with an aggregate nominal value of up to RM10.0b in late-June last year. The Unrated Sukuk Murabahah Programme has a tenure of up to 30 years from its first issuance. Since then, Maxis has issued in total four series with a total nominal value of RM4.09b as of end 1Q17. These drawdowns have increased its 1Q17 net debt to EBITDA ratio to 1.96x (vs. 1.88x in 4Q16), which is close to its internal target of 2.0x. Having said that, we understand that the Sukuk Murabahah Programme debt covenant ratio was set at a rate higher than its internal target, thus suggesting that there is still room for Maxis to raise funds via the Sukuk Programme, if need be.

Source: Kenanga Research - 20 Jun 2017