TM International Better off privatized?

December 15, 2008 at 6:30 am Leave a comment

· Fall from grace
TMI’s share price has certainly seen better days, as it currently languishes at RM3.48, near its all-time low of RM3.12 since its demerger with TM in April. From a reference price of RM7.85, TMI has since fallen 56%. This brings us to the question of whether is TMI better off privatised?
· Issues facing TMI
The issues facing TMI bear a similar resemblance to those of Maxis when Maxis announced it was being taken private by Binariang Sdn Bhd in May 2007. Back then, Maxis was expanding rapidly overseas in India and Indonesia, which required substantial capex resulting in increased gearing. Similarly, TMI is not only expanding in India and Indonesia, it is also has a presence in other emerging markets notably in Sri Lanka and Bangladesh. So far, TMI has spent RM4.8bn in capex for 9M08, and is expected to outlay RM5bn to RM5.5bn in FY09.
· TMI saddled with debt
We believe TMI shareholders are facing the same problems that prompted Maxis to go private, as TMI is laden with a whopping RM18.9bn in debt resulting in a high gross debt/equity ratio of 1.5x. TMI has doubled its leverage seeing that gross debt only stood at RM9.1bn as at end FY07
when its gearing ratio was significantly lower at 0.9x. The increase in gearing comes about due to the acquisition of a stake in Idea Cellular (RM6.5bn) and refinancing of amount due to TM (RM4bn). With so much debt, interest costs are expected to rise to as much as RM1.2bn in FY09.
· Re-list when earnings stabilize?
As TMI’s earnings are likely to face volatility in view of higher gearing and interest costs, perhaps Khazanah in privatising TMI could take the same approach by Maxis, i.e. possibly re-list when earnings subsequently stabilize. When Maxis was privatised, the market viewed the exercise as a
viable option to give T. Ananda Krishnan, the controlling shareholder of Binariang greater flexibility to manage Maxis and re-list on Bursa when earnings are “stable” again. Had Maxis not been taken private, its shareholders would have faced increased earnings volatility and lower
dividend payouts due to higher borrowing costs.
· How much to privatise?
At current market prices, Khazanah could spend about RM7.2bn to buy out the remaining 55.5% equity stake (2.08bn shares). Khazanah is the largest shareholder with 44.5% equity stake, followed by EPF (14.5%) and PNB (8.5%). Assuming a 20% premium received by Maxis shareholders, Khazanah would only need to outlay RM8.7bn to take TMI private.
· Valuations cheap?
TMI is currently valued at a PE ratio of only 8.5x based on FY07 earnings. Based on a theoretical 20% premium, Khazanah would only be paying a PE ratio of 10.3x at RM4.18 per share. Compared to Maxis’ PE ratio of 18.6x upon privatisation, valuations are currently cheap for Khazanah to take TMI private.
· Is the theoretical offer price of RM4.18 compelling?
Understandably, investors may be reluctant to part with their TMI shares as valuations have fallen quite substantially. Based on the entire trading history of TMI, we estimate a VWAP of RM5.90 for TMI shares, which is very close to our target price of RM5.95. Compared to the theoretical offer price of RM4.18, this represents a variance of 29.7%.
If Khazanah were to take TMI private at RM5.90, it would be doing so at a PE ratio of 14.5x, which is not really cheap anymore considering the KLCI is trading at a PE ratio of 10x. At RM5.90, Khazanah would have to fork out RM12.3bn instead. However, RM5.90 may appear fair on an EV/EBITDA basis at 9.0x based on FY07 figures, considering that Maxis was privatised at 9.8x. In comparison, our theoretical offer price of RM4.18 translates to a lower EV/EBITDA ratio of 7.3x.
· Maintain BUY call, target price unchanged at RM5.95
Faced with high capex requirements, a heavy debt burden amid depressed stock price levels, this may be an opportune time for Khazanah to take TMI private with the view of re-listing later when earnings are more stable. We maintain our BUY call on TMI with an unchanged target price of RM5.95 based on sum-of-parts valuation. Risks include (1) lower earnings contribution from Excelcomindo due to weakening Rupiah, (2) lower than expected subscriber growth and spending due to global credit crunch and (3) margin compression domestically due to mobile number portability.


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