When Maxis Communications Bhd or “the old Maxis” debuted on the Main Board in July 2002 with just over three million subscribers, the country’s mobile penetration rate was under 40%. By the time it was privatised five years later in July 2007, Malaysia’s mobile penetration rate had gone just above 90% and its subscriber base had more than tripled.

Growth numbers made headlines and its Ebitda (earnings before interest, tax, depreciation and amortisation) margin of over 50% was the envy of most of its peers, both locally and abroad.

Between 2006 and 2008, Maxis’ revenue grew 21.5% to RM8.45 billion in FY2008 from RM6.96 billion in FY2006, even as its mobile subscriber base expanded around 18% a year to 11.2 million users in December 2008 from 8.1 million users in December 2006. Mobile revenue, which made up over 90% of Maxis’ group revenue, grew 20.4% to RM7.9 billion in 2008 from RM6.5 billion in 2006.

Today, thanks to people who carry more than one mobile phone, Malaysia’s mobile penetration rate is already above 100%, alongside the likes of Singapore, Hong Kong, Taiwan and Australia. Mobile operators are now looking to services such as mobile broadband as well as value-added 3G data services to grow or maintain average revenue per user (ARPU) numbers.

Packages for enterprise users have turned more competitive following the introduction of mobile number portability (MNP) last October. The battle for price-sensitive prepaid users has also become cut-throat, with at least four active mobile virtual network operators (MVNO) selling rebranded mobile services riding Celcom (M) Bhd’s network.

And it is in this scenario of a highly competitive, near-saturated market that Maxis Bhd or “the new Maxis” is seeking to list on the Main Board — without its sister companies in India and Indonesia that are still in the red due to start-up losses.

Given tougher market conditions, the question is, what kind of growth can Maxis deliver in the current environment?

Investors who follow Maxis would remember that Axiata Group Bhd’s group chief executive Datuk Jamaludin Ibrahim, the “face of Maxis” for 10 years until July 2007, had used the words “pressure cooker” to describe how it felt like to be faced with the need to deliver growth “quarter after quarter after quarter” for some 40 consecutive quarters.

In fact, delivering in terms of growth and dividend was so much expected of Maxis that everyone missed the fact that it made more sense for billionaire businessman T Ananda Krishnan to privatise Maxis and use the more than RM1 billion cash a year it was paying as dividend to fund growth in India and Indonesia. And the surprise privatisation bid came in May 2007 and its partnership with state-owned Saudi Telecom Co Ltd soon thereafter.

From the growth that Maxis has delivered over the past two years under its new group CEO, Sandip Das, the need to perform remains imperative. Maxis is, after all, still “an AK company”.

In Malaysia, Maxis is still the leading mobile operator, with its 11.25 million subscriber base, commanding 40% of the market, ahead of Celcom’s 34%, DiGi.Com Bhd’s 25.3% and U Mobile Sdn Bhd’s 0.7%. Maxis’ revenue market share also remains the largest, at about 41%, versus Celcom’s 33% and DiGi’s 25%.

Rivals catching up
However, due to competitive pressures, Maxis’ Ebitda margin fell to 50.6% for the six months ended June 30, 2009, from the 54.2% it enjoyed in the previous corresponding period. Maxis is not alone. DiGi’s Ebitda margin for the 1HFY2009 was also lower y-o-y at 43.9% compared with 47.2% before, mostly due to higher sales and marketing costs. Celcom’s slide, however, was relatively smaller, down less than one percentage point y-o-y to 44.6% for 1HFY2009 from 45.5% before.

There are signs of Maxis’ dominance coming under threat.

Maxis’ postpaid ARPU is still the highest in the industry, at RM102.9 per month, compared with Celcom’s RM94 and DiGi’s RM82. But its postpaid revenue market share has slipped below the 50% mark. Maxis is also no longer the leader in terms of prepaid ARPU.

Notwithstanding the size of the subscriber base, DiGi’s prepaid ARPU was at RM49 per month in 2QFY2009, ahead of Celcom’s RM42 and Maxis’ RM41.6 per month. This has caused Maxis’ dominance in terms of blended ARPU, or the average amount that each of its mobile subscribers spends a month, to narrow. Maxis’ blended ARPU stood at RM56.50 end-June, slightly ahead of DiGi’s RM54.40 and Celcom’s RM53.50.

Maxis was also the only one of the big three operators to lose prepaid subscriber market share in 1H2009. It lost 66,200 prepaid users in the six months ended June 30, 2009, but its total subscriber base still grew during the period, thanks to the 223,900 postpaid subscribers it added. Still, while its postpaid net additions were ahead of DiGi’s 77,000 users, Celcom grew faster by adding 384,000 postpaid users over the same period. And Celcom added 553,000 prepaid users at the same time, well ahead of DiGi’s 91,000 users.

Celcom has made known its intention to unseat Maxis as market leader by 2011. As at June 30, 2009, Maxis, with 11.42 million mobile phone subscribers, had a 1.72 million user lead on Celcom’s 9.7 million users, while DiGi’s base stood at 7.23 million.

One of the factors which caused some Maxis prepaid users to opt out earlier this year was its failed strategy to change its billing period to 60-second from 30-second blocks, which effectively meant users who made short calls had to pay for more unused talk time. This has since been reversed but it remains to be seen if Maxis can successfully retain its dominant lead on rivals.

Maxis, whose average monthly blended churn (subscriber drop-out) rate jumped to 4.2% for the six months ended June 30, 2009 (from 3.6% in 2008), expects the churn rate to “continue to be under pressure with the entrance of MVNOs and intensifying competition”.

In terms of mobile broadband users, Celcom has been more successful in growing its subscriber base.

As at end-June, it had 420,000 mobile broadband users, more than double Maxis’ 171,200 users. DiGi, which launched its 3G mobile broadband service in March this year, had 11,000 users end-June. Both Celcom and Maxis launched 3G in 2005. But the fact remains that Celcom has the largest pool of 3G mobile broadband users regardless of whether there is merit in the argument that it costs too much for operators to upgrade their network to justify taking in a lot of users who want quality but are not willing to pay a lot of money. There is also competition from four WiMAX licensees on this front.

Where would growth come from?
In its exposure draft listing prospectus (not yet registered by the SC and may still be subject to amendments), posted on the Securities Commission Malaysia website on Sept 17 for public comment until Oct 12, Maxis said it believes there is still “significant future growth opportunities” in the less penetrated regions of Sabah and Sarawak, the east coast of Peninsular Malaysia as well as the youth segment, although SIM card penetration has exceeded 100%.

“Maxis believes Malaysia’s demographic profile, whereby 50% of its population is estimated to be under 25 years of age, provides opportunities for growth both in terms of subscribers and adoption of new data services,” the exposure draft prospectus read.

Maxis also said it saw a 31.1% subscriber growth in the SME segment and 24.1% subscriber growth in the corporate sector between 2007 and 2008, adding that it intends to “consolidate its market leadership in the mobile market” through “a combination of strategies” to preserve and enhance cash flow generation, as well as to “address tangible growth opportunities in areas such as data and broadband”.

Nonetheless, the fact remains that competition is getting tougher and margins are being eroded. Without the potential growth factor from markets abroad, Maxis’ valuations would likely be closely tied to its ability to generate cash and pay dividends.

These factors would likely not be missed by investors as they weigh how much they are willing to pay for Maxis shares being offered for sale. The indicative IPO price for institutional investors is RM5.50 apiece, according to OSK Research. The research house considers RM5.50 a share for institutions (and RM4.95 a share for retail investors) to be “fair” as it would imply an equity valuation of RM37.1 billion or 16.3 times annualised 1HFY2009 earnings and nine times EV/Ebitda.

“The valuation is on a par with the prospective PER of 14 to 16 times at which domestic and regional mobile companies are trading, albeit at a premium to regional 5.2 times EV/Ebitda. We deem this fair considering Maxis’ superior Ebitda margin of over 50%,” OSK says in a note dated Sept 23.

ECM Libra Research reckons that Maxis will be priced at RM5.60 apiece, being 18 times earnings, but estimates that the final price could range from RM5.20 to RM6.20, being 16 to 20 times FY2010 estimated earnings.

Affin Investment Research and HwangDBS-Vickers Research had more conservative valuations. Affin puts Maxis’ price range from RM3.67 to RM4.40, assuming between 5% and 6% yield. HwangDBS-Vickers’ estimated range of RM4 to RM4.70 was arrived at using an array of valuation methods derived from a target market capitalisation of between RM30 billion and RM35 billion.

Back-of-the-envelope calculations using Maxis’ annualised 1HFY2009 net profit numbers and its 75% dividend payout commitment price Maxis between RM3.80 and RM5.70 apiece, assuming yields of between 4% and 6%. This price range would imply valuations of between 12.5 and 18.7 times annualised 1HFY2009 earnings per share of 30.43 sen, and EV/Ebitda multiples of between 7.81 and 11.13 times. Market capitalisation would be between RM28.5 billion and RM42.75 billion at this price range.

DiGi, which closed at RM21.32 last Friday, was trading at 15.6 times FY2009 earnings and 7.25 times FY2010 EV/Ebitda, according to Bloomberg data. Singapore’s MobileOne Ltd (M1), another yield-stock, was trading at 11.02 times FY2009 earnings and six times EV/Ebitda. Closing at S$1.84 last Friday, M1’s indicative yield was at 7.3%, according to Bloomberg data.

Notably, Maxis’ actual FY2010 earnings would see higher finance costs from the RM5 billion loan it is seeking to repay its parent company, among other things.

To match the old Maxis’ market capitalisation of RM39 billion at the point of privatisation, the new Maxis shares will need to be quoted at least at RM5.20 apiece.

The final retail and institutional price would be decided after a book-building exercise by joint global coordinators and book-runners CIMB Investment Bank Bhd, Credit Suisse (Singapore) Ltd and Goldman Sachs (Singapore) Pte Ltd.

While a straightforward Main Board listing would take some four to six months and the company will have six months from the date of approval to decide the listing date, expectations are that Maxis will be listed by year-end and be in time for inclusion into the 30-stock bellwether FBM KLCI at its upcoming constituent review in December.

To qualify for inclusion, Maxis needs to be listed by Nov 26 as the constituent review will be done using full market capitalisation data at the last trading day of November. Any constituent change in the upcoming semi-annual review will take place effective Dec 21.

In any case, Maxis’ relisting — first announced by Prime Minister Datuk Seri Najib Razak on July 21 — would boost Malaysia’s current total market capitalisation of RM920 billion by between 3.8% and 4.3%. This assumes a RM35 billion to RM40 billion market capitalisation, which prices Maxis at between RM4.67 and RM5.33 apiece. The boost to the FBM KLCI’s market capitalisation, which stood at RM368 billion last Friday, would be greater at about 9.5% to 10.9%.

Be that as it may, the absence of the potential growth factor from markets abroad and heightening competition in a near-saturated market at home mean it would be tough for the “new Maxis” to outshine the “old Maxis”.

This article appeared in The Edge Malaysia, Issue 774, Sep 28-Oct 4, 2009.