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Maxis: Is A Payout Ratio Above 100% Sustainable?
By: Tan Jia Hui
Articles (82) Profile

Smart phones are becoming increasingly ubiquitous in today’s society. It is a common sight to see people with their heads bent down looking at their phone, streaming videos, browsing websites or checking emails – all made possible with mobile data.

In a way, smart phones have transformed the telecommunications industry. With consumers’ growing appetite for data, it is not so much of the amount of voice calls or SMS that matters, but rather the amount of data and the quality (speed and penetration).

Malaysia is a saturated market for the telecommunication industry, with mobile penetration standing at 148.5 percent as of February 2015, according to data from the Malaysian Communications and Multimedia Commission.

As of FY14, Maxis is Malaysia’s largest telco based on total revenue generated in the domestic market. But with competition heating up, does the company have what it takes to remain on top?

Recovery Faced With Competition
Amidst increasing competition, the company has recorded modest growth in top line from RM8,869 million in FY10 to RM9,084 million in FY13. However in FY14, the group recorded a fall in turnover, stemming from the fall in service revenue (excludes devices and hubbing sales) due to lower voice and SMS usage, partially offset by higher mobile internet revenue.

On the other hand, earnings have been decreasing between FY11 and FY14, contributed by a variety of factors including higher interest expenses, depreciation charges and poorer gross margins in certain years.

Source: Company

Zooming in on the mobile segment, Maxis had been worst hit in its prepaid segment, losing subscribers, mostly migrant workers. Its prepaid subscribers declined from 10.8 million in 1Q13 to 9 million in 2Q14, driven by network issues and over-priced packages.

As part of the transformation under chief executive officer Morten Lundal who joined in 2013, the group focused on and revamped its prepaid segment. Thus far, the results have been positive, with the firm adding 0.5 million prepaid customers in 4Q14, to hit 9.6 million.

While Maxis seems to be moving out of its negative momentum, the performance in the coming quarters will be crucial in determining the success of its transformation.

Faced with intense competition in the sector, it will certainly not be an easy job. Rivals continues to enlarge its subscriber base while being the only of the three largest Malaysian telcos (including Celcom Axiata) to record service revenue growth in FY14.

U Mobile, a relatively newer player in the industry is also expanding its network and could employ an aggressive pricing strategy to gain market share. While a price war is seen as unlikely, prices are likely to be suppressed.

Anticipated Lower Dividends From FY15
After the group’s relisting in 2009, it has paid out a dividend of RM0.40 per share each year from FY10 to FY14, amounting to approximately RM3 billion per year. In each of the five years, payout ratios exceeded 100 percent. Interestingly, Maxis’ free cash flow (FCF) during each period did not exceed RM2.4 billion.

Source: Company

So where did the extra money used to payout dividends come from? Borrowings.

From FY10 to FY14, the company had to borrow about RM1 billion per year to top up the shortfall.

As a result, Maxis’ net debt to EBITDA (earnings before interests, taxes, depreciation and amortization) has doubled in the period (FY10: 1x, FY14: 2x).

The group’s management views this amount of leverage as ideal and guided in June 2014 that it aims not to add on much more debt, adding that the firm’s dividends will not be much higher than its FCF from FY15.

While the company did not give a formal guidance on its dividends policy going forward, assuming a full payout based on FY14 FCF, it would translate to an approximate dividend of RM0.30 per share, a 25 percent fall.

Short-term Pain, Long-term Gain?
Yield is expected to be depressed on the back of lower dividends, which is likely to cause weakness in the near term. (Maxis’ share price had been on a downtrend after management announced lower dividends from FY15, hitting a low of RM6.21, down from approximately RM6.90. Share price has since recovered to above RM7.)

However, with subdued sales and elevated levels of capital expenditure, this might be a prudent move by Maxis’ management that will help ensure long-term sustainability of the business. With the anticipation of higher interest rates, curbing borrowings would also reign in interest expenses.

As part of its transformation plan, Maxis also saw a reduction in head count, streamlining and the revamping of its core businesses.

While gradual operational improvements were noted in 4Q14, the figures are hardly exciting to investors. It still has to be seen if the improvements can eventually translate to better earnings in future periods, particularly after management said it expects only a low single-digit growth in service revenue is FY15.

Given the run up of the company’s share price in recent months, possibly due to signs that the firm’s transformation is gaining traction and also the attractive yield presented to investors when the share price fell (management had previously guided that FY14 total dividend would remain at RM0.40 per share, meaning a final dividend of RM0.08 per share), valuations seems dear at the moment.

Between FY10 and FY14, Maxis traded at price-to-earnings (P/E) ratios between 13.3 and 32.1. As of 20 April, the firm’s stocks yielded a P/E of 31.3, placing it close to the upper range.

Additionally, its main competitors and Celcom Axiata (part of Axiata Group) are trading at P/Es of 23.9 and 25.8 respectively, as of 20 April. in particular, has presented better earnings growth, greater operational efficiency and the ability to monetise data, which seems to present more value for investors.

Given the limited catalysts for the group and the telecommunication industry in general, investors might be better off seeking opportunities elsewhere, for now.

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

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