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This article first appeared in Corporate, The Edge Malaysia Weekly, on May 2 - 8, 2016.

 

BGSM-Shareholding_TEM1108_12_theedgemarketsTELECOMMUNICATIONS companies have to strike a balance between paying dividends to shareholders and retaining enough cash to reinvest and grow. Maxis Bhd, led by chief executive Morten Lundal, made the difficult decision to halve dividends to 20 sen a share in 2015, ending the company’s practice of borrowing money to pay dividends.

But will it be able to stay the course?

Maxis’ 65% shareholder, BGSM Management Sdn Bhd (BGSM), needs a substantially higher dividend to be paid this year in order for it to service some RM5.4 billion in debt.

Back-of-the-envelope calculations show that BGSM needs Maxis to pay a dividend that is at least 50% higher, at 30 sen a share, to service some RM324.5 million in interest and RM1.07 billion in principal payments due this year.

“The BGSM bonds have been structured such that the interest and principal are solely serviced by the dividend income from BGSM’s 65% stake in Maxis. If the dividends alone are insufficient, the company has no other source of funds. BGSM may have to refinance the bonds if Maxis doesn’t increase its dividend this year,” explains one fund manager.

Ananda Krishnan’s Usaha Tegas Sdn Bhd has a 37% stake in BGSM while 30% is held by Harapan Nusantara Group and 25% by Saudi Telekom Company (see chart).

It is worth noting that BGSM has sufficient capital to redeem the bonds. Its 65% stake in Maxis is worth RM28.5 billion, substantially more than the RM5.4 billion debt outstanding. However, the bond covenants will restrict BGSM from disposing of the shares in a piecemeal fashion. Hence, it is merely a short-term cash flow mismatch that the company is facing, says the fund manager.

A 20 sen dividend per share would generate RM975.89 million for BGSM. However, it has RM324.53 million in interest payments due this year as well as a principal repayment of RM1.07 billion due in December. Based on BGSM’s financials, the company does not have enough cash to make up for the RM420 million shortfall.

That said, Maxis’ management should not have any obligation to declare higher dividends simply because its shareholders have debts to pay. In fact, the management has bigger worries of its own.

It has to ensure it has enough cash to fund some RM1.3 billion in capital expenditure this year, as well as the acquisition of spectrum from the government that is being re-farmed this year.

To make matters worse, increased competition in the industry could put pressure on Maxis’ earnings while reducing the cash it has to pay dividends and reinvest.

Recall that Maxis lost 1.03 million subscribers year on year as at March 31, or an 8% drop. In the first quarter of 2016 alone, the company lost 415,000 subscribers. It does not help that Maxis found itself fending off customer complaints that went viral on social media, which prompted more subscribers to leave.

In response, Maxis has increased the amount of data available to its existing customers but the damage may have already been done. It remains to be seen if the telco will be able to defend its margins and earnings this year but the outlook is not promising.

Maxis may be enjoying 54% margins on earnings before interest, tax, depreciation and amortisation (Ebitda) and the highest average revenue per user (ARPU) in the industry at the moment, but that might not be sustainable going forward if it cannot defend its market share.

Meanwhile, weaker earnings would weigh on Maxis’ ability to pay dividends. Even after dividends were halved from 40 sen to 20 sen a share in 2015, it works out to a payout of 86% of earnings. Lundal had previously indicated that he would prefer to cap the company’s dividends at 75% of earnings. In previous years, dividend payout exceeded 100%. 

While some investors might not view higher dividend payments in a negative light, Maxis’ borrowings are already very high at 1.8 times net debt to Ebitda — the highest among telcos in Malaysia, which range from 0.3 to 1.3 times. Hence, it is not feasible for Maxis to borrow to fund its dividends.

Against this backdrop, it will be interesting to see how Maxis manages its dividend policy this year and if the BGSM bonds will be a factor.

BGSM could still call on its shareholders to fork out cash to service the bonds. But that would just be a temporary measure. There is another tranche of the bonds maturing in end-2017 that will require RM1.08 billion to be paid. Alternatively, BGSM might have to refinance the bonds, which would allow it to sell some of its shares in Maxis.

 

 

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