Cover Story: Will Maxis adjust its dividend policy or raise capital?

This article first appeared in The Edge Malaysia Weekly, on April 1, 2019 - April 07, 2019.

Cheow: While Maxis’ new strategy is leading the group in the right direction, the service revenue target could be a “tall order” for now

Foong: We believe regulatory pressure on the pricing of fixed-line broadband services could suggest limited growth in the pricing of wireless services as well

Mohamad Khairul: While the pursuit of convergence service provides growth opportunity from untapped markets, we are concerned over the intensified capex needed




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AT the 20 sen per share dividend Maxis Bhd has been paying out annually in the past four years, last Thursday’s closing price of RM5.36 would have delivered an implied yield of about 3.7%.

The question here is whether the board will retain the same dividend going forward and whether it would need to do so for Maxis to remain an attractive proposition for investors.

For one, Maxis’ net debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) ratio was 1.86 times as at end-2018 — near the 2 times it is traditionally comfortable with. Net debt to equity or gearing, however, was only 1 time.

Maxis’ gearing level fell from 1.8 times as at end-2016 to 1 time as at end-2017 after it raised RM1.66 billion from the placing out of 300 million new shares at RM5.52 apiece in June, being a 6.12% discount to the closing price on June 16 and a 9.24% discount to the five-day volume weighted average price then.

“The new equity will strengthen Maxis Group’s financial position and give it the flexibility to fund future spectrum assignment fees and growth strategies,” Maxis said in a statement on June 20, 2017.

Before FY2015, Maxis paid out a dividend per share of 40 sen every year — more than 100% of its earnings — nudging debt levels above RM9 billion in FY2015, with net debt-to-Ebitda levels also above 1.8 times in FY2015 and FY2016 before falling in FY2017 as debt was paid down to the current RM7.6 billion.

Maxis has not paid out more than 100% of its earnings since FY2015, with payouts ranging from 70% to 88%, Bloomberg data shows.

It is not immediately certain if Maxis’ debt ratios will look significantly higher with the adoption of the MFRS16 accounting standard on leases in January this year.

When releasing its 2018 full-year results, Maxis had guided that operating free cash flow for 2019 should be in line with 2018’s. Nonetheless, Maxis guided for a low, single-digit decline in service revenue year on year and mid-single-digit decline in Ebitda year on year for 2019.

Analysts’ forecasts already reflect the guidance.

Bloomberg’s consensus poll of analysts points to Maxis’ net profit for FY2019 being RM1.68 billion, or 5.8% lower than the RM1.78 billion recorded last year. Even for FY2020, analysts’ consensus net profit is RM1.71 billion or 3.67% lower than FY2018’s, Bloomberg data shows at the time of writing.

There are some who reckon Maxis may trim dividends this year, as reflected by consensus dividends of 19.5 sen in FY2019 and 19.7 sen in FY2020 — a shade below FY2018’s 20 sen per share.

None of the analysts tracking Maxis had a “buy” call, Bloomberg data shows. Instead, nine had “hold” calls while an overwhelming 19 said to “sell”. Target prices ranged from RM4.30 to RM5.61.

If Maxis’ share price eases nearer to RM5, the yield will be 4% if the dividend continues to be 20 sen per share. At the lowest target price of RM4.30, a dividend of 17.2 sen would give a yield of 4%, a back-of-the-envelope calculation shows.

Although Maxis has laid out plans to evolve into a converged telecommunications leader in the domestic market over the next five years, the conservative guidance points to the company needing time for its plans to bear fruit.

Competition is expected to intensify as players set out to defend their turf while newcomers seek to make their mark. Maxis is already losing some income as the Radio Access Network (RAN) sharing agreement with U Mobile Sdn Bhd is slated to end by the middle of this year.

When Maxis announced its 4QFY2018 results, the financial research fraternity was surprised by the lower-than-expected earnings.

Maxis’ FY2018 net profit fell 18.31% from RM2.18 billion in FY2017 while revenue declined 2.41% to RM9.19 billion.

Profitability was affected by higher-than-expected operating expenditure in 4QFY2018, which was due to a one-off cost of RM250 million spent to gain first-mover advantage in the home fibre business. Additionally, Maxis invested its resources in the enterprise segment to accelerate initiatives that are critical to laying the right foundation for growth.

“As part of our ongoing network improvement efforts to maintain a high level of customer experience, network expenses were also increased for the quarter. The group also invested in a multiyear productivity programme to optimise its operating model and cost structure,” Maxis says in a filing with Bursa Malaysia.

In his Feb 18 note to investors, Kenanga Research analyst Cheow Ming Liang says while Maxis’ new strategy is leading the group in the right direction, the service revenue target could be a “tall order” for now, given the heightened competition in the fixed broadband space coupled with increasing competition in the enterprise solutions and ICT segments.

“All these suggest that the group’s ICT initiatives could potentially face a longer gestation period,” he says, downgrading the counter to “underperform” and reducing his target price to RM4.90.

“Maxis is aiming to maintain its strong leadership position by leveraging its extensive 4G network and expanding its presence in the fixed broadband market in both the consumer and enterprise segments.

“Having said that, the termination of the RAN sharing arrangement with U Mobile, dilution impact in fibre Arpu (average revenue per user) coupled with increasing customer acquisition costs and the new regulatory policies are set to impact the group’s performance in FY2019,” he adds.

In her Feb 18 research note, PublicInvest Research analyst Eltricia Foong also cut her forecast earnings for FY2019 as she expects costs to remain elevated given the change in strategy to become a converged player and grow the home fibre and enterprise businesses.

“Also, we believe regulatory pressure on the pricing of fixed-line broadband services could suggest limited growth in the pricing of wireless services as well,” says Foong, who has an “underperform” call and target price of RM4.90.

As part of its strategy to be a leading converged communications and digital services player by 2023 with an annual service revenue of RM10 billion, Maxis has also guided that on top of its annual RM1 billion capital expenditure (capex), the group is allocating another RM1 billion over the next three years to seek growth. Its service revenue was RM8.07 billion in FY2018, 2.45% lower than FY2017’s RM8.27 billion.

“While the pursuit of convergence service provides growth opportunity from untapped markets, we are concerned over the intensified capex needed. Within the fixed broadband space, we believe that competition has heated up drastically while regulatory risk is inherent amid some confusion over the MSAP (mandatory standard on access pricing), for example,” says BIMB Securities Research analyst Mohamad Khairul Fahmi.

Notwithstanding Maxis’ net debt-to-Ebitda of 1.86 times, Mohamad Khairul says its RM10 billion sukuk programme could be a fundraising option to fuel growth.

“This allows Maxis to sustain its 20 sen annual dividend per share while pursuing its growth strategy,” says Mohamad Khairul, who has a “hold” call and target price of RM5.15 on the stock.

If he is right, private-sector wage earners will also stand to benefit. The Employees Provident Fund has a 11.28% stake in Maxis and the dividend income it receives will add to the pool of money it uses to declare dividends for members.



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