KUALA LUMPUR: Maxis Bhd’s announcement that it is raising RM2.45 billion in a sukuk Musharakah caught a few in the investing community by surprise. Most analysts would agree that Maxis, one of the country’s Big Three telcos, certainly does not need the money.

A look at Maxis’ latest balance sheet shows RM916 million in cash and bank balances as at end-September 2011. Its net cash flow from operating activities stood at RM2.7 billion for the same period.

“While Maxis is in no desperate need of the money, it certainly comes in handy as the company enters the beginning of its capital expenditure cycle. The company could also be taking advantage of the attractive sukuk rates now available in the market, which are now quite popular as a funding tool,” said an analyst.

Maxis had also previously indicated its intention to have a longer term target net debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio of 1.75 times. Its current net debt-to-Ebitda ratio stands at 1.1 times.

But the move has sparked speculation among analysts and investors that Maxis is gearing itself up for a special dividend payout, thus following in the footsteps of rival DiGi.Com Bhd and industry stalwart Telekom Malaysia Bhd (TM).

Analysts are mixed on whether this exercise will come to pass.

OSK Research, however, believes that it might, stating, “It [the sukuk issuance] could also allude to a potential special dividend if the RM1 billion (13 sen per share) in proceeds earmarked for working capital flowed back to shareholders.”

To recap, in an announcement made last Thursday, Maxis announced its proposed issuance of the RM2.45 billion sukuk, which would represent the first tranche of a proposed unrated Musharakah programme. Maxis would be using RM1.45 billion of the proceeds to refinance its debt and RM1 billion for capital expenditure and general working capital.

While a question mark still remains over how Maxis intends to use the funds, if they eventually materialise as a payout to shareholders it would cement the position of telco stocks as defensive plays.

For the longest time, investors acquired telcos based on capital appreciation prospects. However, with the market for voice now over-saturated and data still in its infancy, most are now looking towards the telcos as defensive picks. It could also mark the point where telcos are now not borrowing in order to just grow their business, but also to entice shareholders with higher dividend yields.  

To be fair, Maxis’ indicative dividend yield of 5.7% based on current levels is higher  than DiGi’s (4.35%) and TM (4.7%), but the better yield is partly due to its weaker share price performance.

Maxis has risen by 6.9% over the past 12 months, closing at RM5.75 last Friday. In comparison DiGi’s share price has gained 55.2% and TM has risen 33.6% for the same period.

“Analysts so far have been disappointed with the dividend payouts for Maxis, which most see as decent but unexciting. So it would not prove surprising for Maxis to possibly take a page from its competitor’s playbook.

“Interest in DiGi has been spurred by its capital management exercise announced last year comprising a share split and a capital distribution. Similarly, TM’s share price benefited from the telco’s disposal of shares in Axiata Group Bhd and Measat Global Bhd, the proceeds of which were returned to shareholders,” said an analyst.

Last year, DiGi announced a 10-for-1 share split in order to increase trading liquidity and a capital distribution of some RM509 million by the first half of 2012. In 2010, TM announced a capital distribution of 29 sen per share arising from its disposal of shares in sister company Axiata Group Bhd and Measat Global Bhd, returning some RM1.04 billion from its share premium account.

Analysts are also expecting another possible bumper dividend payout from TM following the disposal of its remaining 100 million Axiata shares when the former announces its 4QFY11 results.  There is no question a higher dividend payout softens the bite from the flattish earnings as the telcos prepare for the next round of change as data becomes dominant.

The telcos themselves would argue, however, that they are still a growth story. Although revenues from voice have been declining, contribution from data is steadily growing, but not enough to make up for the drop from the former.

However, the evolution is happening slowly but surely. Maxis was the first to shift into offering home services, tying up with TM and using the latter’s high speed broadband. And now with 4G/LTE services due to take off next year, Maxis’ need for funds to gird its network is understandable. It is just a question of whether investors will bite and hang on for the ride.

OSK believes that Maxis’ upcoming 4Q numbers are unlikely to be exciting. The research outfit maintains its “neutral” recommendation on the stock.

“This is based on the anticipated margin dilution from the recent launch of its fibre-to-the-home service, and concerns over slowing revenue growth.

“Though a seasonal quarter, we expect Ebitda to come under pressure from the full quarter impact of its home services and higher subscriber acquisition cost due to the launch of the iPhone 4S,” said OSK.

This article appeared in The Edge Financial Daily, February 20, 2012.