TM International - BUY

TM International – Right issue details finally (Company Update)

Price: RM2.61 (theoretical RM1.78)
Target Price: RM2.50 (ex-all)
Recommendation: BUY

Telekom International (TMI) much awaited details for the proposed cash call is as follows:
· Renounceable rights on a 5:4 basis with an issuance of 4.7 billion new shares. Post rights, total share outstanding to balloon to nearly 8.5 billion shares versus 3.8 billion earlier;

· Pricing of RM1.12 for the new shares which is 50.9% discount to the 5-day volume weighted average market price up to March 23 of RM2.28 and 31.7% to the theoretical ex-rights price of RM1.64;

· Total amount of RM5.25 billion will be raised from the cash call;

· No official guidance on the time line from the current announcement but based on recent telecon, management is looking for end 2Q09 for closure.

Our take on the above announcement:
· Share issue is larger than what we had anticipated as well as the street’s. Given the large discount to the current underlying, shareholders that elect not to participate will be diluted substantially to the tune of 40%; and

· Pricing with the huge discount is deliberate to encourage take-up and hence minimize the burden on the three large incumbents including Khazanah, EPF and ASB which together controls some 68% of the stock.

Recommendation
· We are tweaking our numbers slightly post announcement with FY09 net adjusted 0.3% higher while FY10 net is raised by 0.9%. Our forecast had been trimmed by 30% for FY09 and 14.7% for FY10 upon the release of the 4Q08 result recently, taking into account the proposed call call;

· Our new Sum-of-Parts is now RM2.50 taking into account the proposed cash call;

· Ex-price based on last done is RM1.78. We maintain our BUY on an ex-basis. Short term weakness could be expected given the recent 20% uptick from the low as well as the larger than expected share issue;

· While the market looks to digest the highly unfriendly cash-call, we are advising clients to focus on the post-right TMI which is on a much stronger footing with total debt / EBITDA dropping to less than 3x compare to 4.6x based on 2008 numbers;

· The RM21billion market capitalization loss since the demerger in April 2008 was excessive and unwarranted we believe. While certain key operational units had underperformed in 2008, the market had completely ignore the underlying worth of the group as well as the potential turnaround of those units especially Excelcomindo which had been impacted by adverse currency movements. With rupiah having been relatively more stable of late, it will definitely be a positive;

· Celcom, the jewel within the group remains to be force in the local scene. Recent strong performance cannot be ignored which had seen them improve their market share by a strong 15 basis points y-o-y. With capacity to generate RM2.5billion operational cashflow, the unit is a prized asset indeed. We have a RM19billion enterprise value for Celcom compare with the current market capitalization of RM16billion for the group;

· For the traders, we would be looking at the rights-to-the-rights for opportunities. Based on the theoretical ex-price of RM1.78 versus the rights at RM1.12, the rights –to-the-rights should be priced at circa RM0.66 maximum.