Maxis has raised RM1.656m via the placement of 300m shares at RM5.52/share following the completion of the book-building process. The additional fund is set to enhance its cash flow, liquidity, generate interest costs savings as well as to improve its gearing level. We have raised our FY17E/18E core PATAMI by 2%/3%, respectively, to reflect the effects of the equity-raising but lowered the DCF-driven target price to RM5.95 (WACC: 6.7%, TG: 1.5%) as a result of an enlarged share base. Maintained MARKET PERFORM.

Completion of the book-building exercise. Maxis completed the book-building process yesterday in relation to the recent announced private placement. The issue price for the placement shares has been fixed at RM5.52, representing a discount of 9.24% to the 5-days VWAP of Maxis’ shares (or 6.12% discount against the last Friday’s closing price of RM5.88). Based on the 300m placement shares, the gross proceeds arising from the private placement is approximately RM1.656m.

Who is the new shareholders? The private placement has attracted both local and foreign institutional investors, according to the management. While Maxis did not share the details of its new shareholder's list, the group’s top three major shareholders’ equity holdings are expected to have some minor changes post the completion of the private placement by end-July. Employee Provident Fund Board (EPF) will see its equity stake increased to 10.02% (vs. 9.75% currently after adding 50m new shares to its portfolio) while its largest shareholder – BGSM Equity Holdings S/B’s equity stake will be diluted to 62.42% from 64.91% currently. Similarly, AmanahRaya Trustees Berhad will see its stake reduced to 8.06% (vs. 8.38%) assumed no additional shares adding in to the custody agency.

Allaying gearing concerns. We believe the recent private placement is to address its gearing concerns rather than for capital expenditure purposes. Although Maxis still have room to propose another private placement (of up to 6% of the total share capital until the next AGM), we believe, the odd is relatively slim given the group still have ample credit facilities via its 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.

Negligible financial impact. Based on the average interest rate of borrowings of c.4.7%, the assumed RM1,656m repayment of borrowings is expected to result in an after tax interest savings of approximately RM59m per annum and improve our Maxis’ FY17E/FY18E core PATAMI by 1.6%/2.5%, respectively. The interest cost saving, however, would mostly offset the EPS dilution arising from the 4% expansion of share base. Balance-sheet-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.

Reduced target price to RM5.95. Maxis’ share capital is expected to increase to 7.81b from 7.51b currently post the completion of the private placement exercise. With that, we have reduced our Maxis DCF-driven target price to RM5.95/share (WACC: 6.7%, TG: 1.5%) from RM6.20/share previously.

Source: Kenanga Research - 21 Jun 2017