This article first appeared in The Edge Malaysia, on November 9 - November 15, 2015.

Six years since its 2009 relisting on Bursa Malaysia with only the Malaysian operations, Maxis Bhd has gone from — in hindsight — an overly generous dividend payer to one with a self-imposed cap of sorts on its cash distribution.

“We have said that we will pay five sen per quarter in 2015. As a priority, clearly we would like to maintain an industry-leading high capex. We would not increase our debts, so any potential dividends beyond the 21 sen must be seen in that perspective,” Maxis CEO Morten Lundal tells The Edge.

A five-sen dividend per quarter is what Maxis paid the past three quarters — down from the more generous dividend per share (DPS) of eight sen per quarter it paid the past six years, which gave as much as 6% yield at a cost of RM2.5 billion to RM3 billion a year.

A dividend of five sen per quarter is also at the low end of projected DPS of 19 sen and 20 sen for FY2015 and FY2016 respectively, according to Bloomberg data. The more bullish of projections go as high as 25 sen and 26 sen.

So, is this an attempt to talk down expectations or is it signalling the need to conserve cash for other use ahead?

To be sure, Maxis needs to pare down its debt — part of it used to reward shareholders handsomely.

As at Sept 30, Maxis had short-term borrowings of RM1.1 billion and long-term borrowings of RM8.8 billion, putting its gearing at 2.1 times, according to theedgemarkets.com.

At its RM6.55 close last Friday, a DPS of 20 sen per annum works out to just above 3% yield — half of what the stock once saw.

That may be why there are only three research houses with a “buy” call on Maxis versus 13 with a “hold” and 14 saying “sell”. At least five of them value Maxis at RM7 and above, but the less bullish go as low as RM4.60 and RM3.20, averaging at RM6.11, according to Bloomberg data at the time of writing.

In an Oct 29 note, RHB Research analysts Alia Arwina and Jeffrey Tan believe Maxis remains most vulnerable to the yield reversal theme among local telcos, as its capex intensity remains high against a backdrop of unrelenting market competition. Analysts at Nomura Research cite earnings uncertainty as among the reasons for a “reduce” call.

Lundal shrugs off the overwhelming bearishness, saying that analysts have their right to their views, just as he does his.

“I have my comments, but I will keep them to myself and my mirror. I go to work to create the best possible company, and they set the [target] price. I don’t think about it too much,” says Lundal, who finds it “strange” when analysts compare the company’s performance with their forecast.

“It’s funny sometimes, some [analysts] say ‘it’s a disappointing quarter’ because we earned less than what they thought, but it’s more about what they thought.”

For the record, Maxis’ RM1.27 billion net profit on revenue of RM6.42 billion in the nine months ended Sept 30, 2015 (9MFY2015), made up only 72% of the street’s full-year forecasts — owing to higher operating cost and competitive price pressures.

“There’s an increase in revenue this year, so things go up and down. In broad terms, I don’t think dramatic changes will happen to our industry in the near term. Having said that, we remain cautious,” says Lundal.

For his part, Lundal prefers to focus on delivering the best value for Maxis’ customers, who are willing to pay for the service they can count on.

As at Sept 30, Maxis had 11.9 million mobile subscribers. Its prepaid base was up 9% to 8.85 million customers while its postpaid customer base was just under 1% lower to 2.78 million. The company also saw a 25% decline in customers in the wireless broadband segment.

Lundal acknowledges that Maxis has lost some customers who chase after the lowest price points, but he is “okay with that” because most Maxis customers are still with the company.

“We are clearly the leader of postpaid. Therefore, [our competitors] are responding with price shouts, cheaper than us on per gig basis, which is sometimes true. If the price difference is perceived to be big, then we’ll lose some customers. What we want is to cater for the experience seekers,” he says.

With the Malaysian telecommunication scene already at a fairly mature stage and mobile penetration at 145%, Lundal says it is only natural that growth is not as high as before.

“As an industry, we have to accept that we are living through this massive rebalancing of revenue,” he says, referring to its “low single digit” topline growth guidance and the need to shore up data revenue to compensate for the decline seen in traditional voice and SMS.

Not all analysts have turned their backs on Maxis (fundamental: 1.15; valuation: 1.10) despite the stock sliding 4.4% year to date to settle at RM6.55 last Friday.

Although there is a 7% downside risk, if one were to believe the RM6.11 Bloomberg consensus target price, a telecoms analyst with a bank-backed research house says long-term investors should consider keeping their Maxis shares because it is “a solid company with a stable operation”.

“To put it simply, if you buy and hold Maxis shares, you won’t wake up [scared] in the middle of the night,” he says, likely referring to the comfort of the smaller but steady dividend stream Maxis is still paying every quarter.

If Maxis succeeds in reducing its gearing and getting its customers to pay more money for the value it provides, the stock would likely win back investors’ favour.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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