Source: The Asian Wall Street Journal

30th January 2001

Time dotCom Leaps Ahead With a Controversial IPO

By CRIS PRYSTAY

Staff Reporter of THE WALL STREET JOURNAL

KUALA LUMPUR, Malaysia -- Does Time dotCom Bhd. know something the Malaysian stock market doesn't?

The telecommunications unit of listed Time Engineering Bhd. is plowing ahead with Malaysia's largest -- and most controversial -- initial public offering since Asia's 1997 financial crisis.

The new listing will come to market at a time when investor appetite for technology and telecommunications stocks has soured. In addition, many securities analysts say the price is based on overblown profit projections.

Waiver Is Expected

Moreover, critics say Time dotCom's parent, Time Engineering, is skirting a key Malaysian listing rule that says a holding company must have a viable business of its own before it can spin off a subsidiary. Once Time Engineering sells its 20% stake in an affiliated company, Renong Bhd., a deal announced in October, its main asset will be Time dotCom. Nonetheless, Malaysia's Securities Commission is expected to grant Time Engineering a waiver allowing the IPO to proceed, according to analysts familiar with the company. A Securities Commission representative said the body wasn't immediately prepared to comment.

Market watchers here aren't surprised. Time dotCom's IPO is a critical part of a restructuring plan for the financially troubled and politically well-connected conglomerate Renong, Malaysia's biggest corporate debtor. The IPO's proceeds will permit Time Engineering, of which Renong owns 47%, to help settle a large chunk of its outstanding debt.

A series of high-profile government bailouts of struggling companies has already tainted the Kuala Lumpur market and the Time dotCom offering is likely to deepen investors' cynicism. Still, a debt workout for Renong is vital for Malaysia's banking system, analysts say. "In sense, it's a Catch 22 for regulators. There's a broad realization that if things don't work out with [Renong's] restructuring, there are wider, far-reaching negative implications for the banking system, and the whole economy," says T.S. Pong, head of research at Jupiter Securities.

A Time dotCom spokeswoman declined to comment on the IPO. She said the company planned to hold a briefing on the offering in the next few days.

Time dotCom's main asset is its extensive fiber-optic network, which serves as a platform for fixed-line telephones and will provide an array of other Internet and telecom services, company officials say. Under the offering, 572 million Time dotCom shares, or 23% of its expanded equity, will be sold through public and private placements at 3.30 ringgit (87 U.S. cents) per share. Totaling 1.89 billion ringgit, Time dotCom's IPO will be the largest to hit the Malaysian market in five years.

According to Time dotCom's prospectus, the proceeds will be used to finance its telecommunications business and to pay off Time Engineering's debts. After the IPO, Renong Executive Chairman Tan Sri Halim Saad, who is also Time dotCom's managing director, will control 55% of Time dotCom through his shareholding in Time Engineering. State-owned investment company Khazanah Nasional Bhd. will hold 20%.

On Monday, Time Engineering stock gained 5.9%, or 16 Malaysian sen, to close at 2.87 ringgit as investors anticipated government support for the IPO. Time dotCom is expected to begin trading on the Kuala Lumpur Stock Exchange in March, but a date for its listing hasn't been set.

In its prospectus, Time dotCom predicted it will have net profit of 150.6 million ringgit for the year ending Dec. 31, 2001 and 376 million ringgit for the following year. The company, which has been unprofitable in each of the last five years, said it will post a 2.6 million ringgit net loss for the year ended Dec. 31, 2000.

Some analysts question Time dotCom's rosy profit projections. One foreign analyst says the projections are based on fixed-line and cell-phone subscriber numbers tallied last year and targeted for this year. Time dotCom has recruited many of those subscribers with heavily discounted services. But, the analyst contends, the company will have to stop discounting in order to secure the cash flow it needs to for the capital investments envisioned in its business plan. He reckons Time dotCom should be valued at about two ringgit a share.

Other analysts simply say that Time dotCom, which currently has just 8% of Malaysia's cellular-phone market and 0.7% of the fixed-line market, is setting unattainable targets. For example, the company predicts that by 2006 it will be earning as much as state-backed fixed-line operator Telekom Malaysia Bhd. earned in 2000. According to consensus estimates, Telekom Malaysia will report 2000 profit of about 894 million ringgit. But several analysts say they doubt Time dotCom can compete with Telekom in the fixed-line market in such a short time, citing other Malaysian fixed-line operators that have failed to make a dent in Telekom's market share.

Despite such criticism, the debt woes of Time Engineering and its parent, Renong, left Time dotCom little room to maneuver on the IPO, analysts say. For example, Time Engineering owes 3.9 billion ringgit on redeemable promissory notes issued in December as part of its own debt-restructuring plan.

"Their pricing was done many months ago and they've stuck to it, even though valuations came off in general for telecom sector," says Jupiter's Mr. Pong. "The reason is they need to raise the cash."

While few private investors are expected to snap up the Time dotCom offering, analysts believe that government-linked funds will purchase most of the shares to ensure the IPO's success. "I don't think any mutual fund managers in their right mind would pick up the shares at this price," says the head of research of a Hong Kong-based brokerage house.

The prospect of intervention by government funds isn't likely to impress critical investors, who reckon that Tan Sri Halim and the Renong group are getting yet another helping hand. In November, Renong subsidiary United Engineers Malaysia Bhd. granted Tan Sri Halim, Renong's executive chairman and controlling shareholder, a 15-month extension to honor his pledge to buy back a large block of Renong shares from UEM.

Tan Sri Halim owes about 3.2 billion ringgit on a put option he bought to mollify investors two years ago, after he announced that UEM would take on debt to buy a 33% stake in Renong. That move was widely seen as a bailout of the ailing parent company at the expense of UEM.

Courting Partners

Analysts are now waiting to see whether Time dotCom can find a foreign partner with the technical know-how and financial backing to bolster investor confidence. Time dot Com, which has been courting potential foreign partners, came close to signing a deal with Singapore Telecommunications Ltd. early last year. But the deal fell apart in May after the Malaysian government objected.

Last week, analysts and fund managers speculated that talks with SingTel had resumed. But bankers familiar with SingTel reject the idea and suggest that rumors were being fanned in Kuala Lumpur to pump up interest in the offering.

"At this price, I don't think a foreign partner would come in. You need a foreign partner to add value, not the other way around," says Kok King Ching, head of research at Worldsec Securities in Kuala Lumpur. He points to the situation in Europe, where companies overpaid for licenses for third-generation networks. He explains: "There's not so much money now to expand abroad."

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