True to expectations, the soon-to-be relisted leading mobile operator Maxis Bhd laid out its dividend proposition in its draft listing prospectus, targeting to pay 75% of its after-tax profit for FY2010 ending Dec 31.

At a glance, Maxis’ 75% payout promise trumps rival DiGi.Com Bhd’s existing conservative dividend policy statement of a minimum payout of 50% of its annual net earnings. But investors familiar with DiGi know that the latter’s dividend payout has consistently exceeded the 50% mark since it began paying dividends in FY2006.

For the year ended December 2008, DiGi paid out some RM1.5 billion or RM1.88 net dividend per share (RM1.94 per share gross), exceeding the RM1.1 billion net profit it made in the same year. DiGi’s dividend payout last year included some RM606.45 million (78 sen per share) in special dividends, an amount that some analysts, including those at ECM Libra Research, expect to be matched this year.

Still, investors would likely welcome a more aggressive dividend promise from DiGi, even if it were only a so-called “headline boost”. Last month, DiGi’s CEO Johan Dennelind told The Edge that the company “will reassess the (dividend) policy, on a need basis”.

At its RM21.30 close last Thursday, DiGi provides a 4.6% yield, assuming its final dividend payout matches its interim dividend of 49 sen per share. (DiGi needs RM777.5 million to pay a RM1 per share dividend.)

Yields could go up to as much as 8.3% if DiGi also repeats last year’s special dividend payout of 78 sen per share, bringing total payout for FY2009 to RM1.76 a share. But to do so, DiGi’s total cash payout this year would come up to RM1.37 billion. It remains to be seen if DiGi’s board will be in favour of such a payout.

Dennelind, who does not sit on DiGi’s board, told The Edge in August that Maxis remains “a respected competitor” and the latter’s relisting would undoubtedly “create some buzz in the market”. But for DiGi, it is business as usual.

“We will leave it to investors to make their decision when the time comes. I believe we have an attractive proposition for many shareholders out there,” Dennelind said.

For now, what’s certain is DiGi’s management has committed to match last year’s operational cash flow of RM1.8 billion, where some RM1 billion free cash flow will be generated this year given that capital expenditure will not exceed RM800 million.

If all of that RM1 billion free cash flow is paid out as dividends, investors could potentially see a final dividend of 80 sen from DiGi this year, given that only 49 sen per share (RM381 million) has been paid out so far this year. A RM1.29 per share payout for FY2009 would bring yield to 6.1%, going by last Thursday’s close.

Still, Maxis’ dividend promise will only be so-called “competition” for DiGi from next year. As such, DiGi may well choose to be more aggressive next year.

Telekom Malaysia Bhd (TM) is the other telecommunications stock that is positioned as a dividend play. TM promises a minimum payout of RM700 million or 90% of its earnings, whichever is higher. It made RM266 million in net profit for 2QFY2009 and RM293.7 million for 1HFY2009. A RM700 million payout translates to 19.6 sen dividend per share. At its RM3.13 close last Thursday, a 20 sen dividend would translate to 6.4% yield.

TM declared an interim tax-exempt dividend of 10 sen per share with its 2QFY2009 results. That followed a 98 sen capital distribution earlier this year that is not expected to be repeated, analysts say, given the need to conserve cash for capital expenditure for its multi-billion ringgit high-speed broadband (HSBB) project.

Maxis’ proposition
Now, the question is, what kind of yield will Maxis be offering with its 75% net profit payout commitment? Will the company be able to give at least a 4.5% yield next year? And at what price will its shares be sold if investors expect a 6% yield?

For the six months ended June 30, 2009, Maxis made RM1.14 million net profit on the back of RM4.24 billion in revenue. Annualising the earnings would bring net profit to RM2.28 billion, slightly below the RM2.4 billion net profit Maxis booked in FY2008 on the back of a RM8.45 billion topline.

To get a yield of 4.5% on an assumed RM1.71 billion payout (75% of RM2.28 billion annualised FY2009 net profit), Maxis shares would need to be priced at about RM5.07 apiece, going by its share base of 7.5 billion shares.

Put another way, expectations of a 6% yield from Maxis would likely put the IPO price at RM3.80 while a yield of 4% would value the new listing at RM5.70 apiece.

Besides pressure on margins from competition, one also needs to keep in mind that the RM5 billion loan that Maxis will take up to repay its parent company Maxis Communications Bhd, which would cost RM185 million per annum in interest, assuming a rate of 3.7%.

Without doubt, apart from the dividend play, there is the element of share price appreciation. But given that the three telcos’ business is primarily domestic, they would be hard pressed to convince their investors beyond its case as a dividend play.

Maxis has an edge over DiGi and TM by being a bigger capitalised stock. Its market capitalisation would be RM37.5 billion if its shares were RM5 apiece, making it the fifth largest stock on the FBM KLCI, after Sime Darby Bhd, Malayan Banking Bhd, CIMB Group Holdings Bhd and Public Bank Bhd, but just ahead of Tenaga Nasional Bhd.

In contrast, DiGi’s and TM’s market capitalisation stood at RM16.56 billion and RM11.2 billion respectively at last Thursday’s close. So in terms of value, a relisted Maxis could be much bigger than the existing dividend-yielding listed telcos.

Nonetheless, as it is, it seems that both DiGi and TM will do fine if they can maintain their existing payouts in absolute terms — although there may be short-term fluctuations if Maxis’ shares are sold closer to RM4 than RM5 apiece at the IPO.

Of course, this is not what the market is reading now! Perhaps when the dust settles, a clearer picture on how much Maxis should be worth will emerge.


This article appeared in The Edge Malaysia, Issue 774, Sep 28-Oct 4, 2009.