Mandiri Sekuritas EXCL: Right issue

Sector:Telecommunication

Right issue

EXCL is planning to go for a right issue for 1,418mn new shares and issue ratio is 1 share for every 5 held. The right price is Rp2,000/share implying a hefty premium to current price. As we hold the view that right issue will not be subscribed by public and therefore free-float would decrease further from 0.2% to 0.17%, we give about 25% discount of to our DCF derived price of Rp2,200/share and arrive at TP of Rp1,650/share. As the downside is 8.! 3% we giv e a Neutral call for the stock.

To right issue 1,418mn new shares. EXCL plans to do right issue which is expected to be completed in Dec09. The approval of the shareholders in relation to the rights issue is expected to be held on 16 Nov09. Right issue will be of 1,418mn share. The right issue ratio is 1 share for every 5 held. The right price is Rp2,000/share translating into total proceeds of Rp2,836bn. The right price is 53.8% premium to the price before the announcement of the planned right issue.

Increase free float if subscribed by public. Currently EXCL is 83.8% owned by Axiata (Formerly known as TM International Berhad),16% owned by Etisalat International and 0.2% by public. Axiata has entered into a standby buyer agreement in which Axiata will also subscribe to the unsubscribed right shares. Currently EXCL’s outstanding shares are 7,090mn shares, and with the right issue the number would go up to 8,508mn shares. If the shares are 100% su! bscribed by public it would increase the free float from 0.2% to 16.8%.

To strengthen balance sheet. The right issue proceeds will strengthen capital base and put some ease on the funding requirement for capex in the short term. However, the long term fund requirement still remains challenging. The capex requirement for EXCL in FY09 is Rp6.7tn. EXCL generates Rp3.1tn in operating cash flow in 1H09, this together with the right issue proceeds is not enough to cover the capex requirement. However with the right issue the D/E ratio would reduce from 355% to 233%.

Maintain Neutral. Earlier we arrived at DCF price of Rp2,100/share to which we had given a discount of about 38% because of low free-float and arrived at TP of Rp1,300/share. Now we have rolled over to FY10, revisited our forecasts and arrived at DCF value of Rp2,200/share (WACC: 10.1%, TG: 3%). Despite higher DCF price we take the view that right shares will not be subscribed by the public, as Rp2,000/share implies a PER10F of 28.1x, while the growth for the company and the industry is marginal. Therefore the right issue will reduce the free float from 0.2% to 0.17%. With this, we give a discount of about 25% to factor in the low free float and therefore arrive at TP of Rp1,650/share, implying PER10F of 23.2x.