Maxis to stop practice of borrowing for dividends

PETALING JAYA: Maxis Bhd plans to stop its practice of borrowing lots of money to part-fund its dividend payments from 2015 onward, signalling a possible dip in its payouts.

Maxis chief executive officer Morten Lundal (pic) said the company would prefer to make its dividend payments solely from the free cash flow it generates and hence cannot guarantee that the telco would be able to continue the same level of dividends from 2015 onward.

Maxis had been borrowing about RM1bil a year to top up the RM2bil free cash flow generated to make the RM3bil or 40 sen per share in dividend payouts since its re-listing in 2009.

“We aim to not borrow much more, and so our dividends will not be much higher than the free cash flows we generate,” Morten said in an interview.

He added: “Going forward, you should expect our dividends to be seen in light of the cash flow generation by the company.’’

Naturally, this has not gone down well with investors. Some analysts have started calling a sell on Maxis from a few weeks ago, which in turn has led to a softening in its share price.

Lundal declined to give any indications of Maxis’ future dividend payouts.

Alliance Research expected Maxis to pay about 30 sen a share in dividends for 2015, basing that on the projected free cash flows of Maxis. This is likely based on Maxis’ track record of generating RM2bil in free cash flows.

But said Lundal: “We are not going to be talking about how much we’re going to pay forward. The only guidance we’re saying is that we’re paying 40 sen this year and then giving guidance that we are about to reach our targeted leverage of the balance sheet,” he said.

He said there has been certainty for a while that the dividend will be what it is and therefore the company’s shares have been priced based on the yield on that dividend.

He explained that while Maxis has had a dividend policy of paying out 75% of net profits, it had actually paid out nearly twice that amount. That was simply because Maxis over the last few years, had a balance sheet that enabled it to efficiently take on more debt.

“But now we are reaching the level where our net debt to our profit or EBITDA (earnings before interest, tax, depreciation and amortisation) is around two times which means it’s a level we are comfortable with. It’s not a magical number as such, it could be higher or lower but it’s a number that we have said to analysts that we are comfortable with.’’

He added that the reason why Maxis borrowed was because it kept investment high in that whole period.

He explained: “Finance theory says there’s a certain so-called optimal level of debt that a company should have and it isn’t ideal for a company to have no debt or zero debt. That’s because often debt is cheaper than equity and often, but on the other hand the company shouldn’t have too much debt because the company’s interest will become vulnerable. That’s the theory and there’s a balance of debt to equity and that balance is for any company to set.

Often it is set at two times net debt to EBITDA. For instance, in Vodafone we had 30 billion euro of debt and 15 billion euro in EBITDA. That level of 2 times of net debt to EBITDA was comfortable to us. We are inclined to be the same and we are approaching the 2 times net EBITDA.’’

Maxis’ net debt as at the end of the first quarter of 2014 was at RM6.6bil from RM6.7bil in the fourth quarter of 2013. During the same period, its cash stood at RM991mil and RM808mil respectively. Its net debt to EBITDA ratio was 1.52 times for full year 2014 (annualised) while for 2013 it stood at 1.56 times.

“The gearing is approaching a level that we’re comfortable with,’’ he said.

In the first quarter of 2014, Maxis paid 8 sen a share in dividend, totalling RM600mil.

As for capital expenditure this year he says it will be around RM1.1bil, which is around RM250mil more than 2013.

“So we haven’t had any caps on ourselves because there’s already been enough room in the balance sheet to borrow more to both satisfy the shareholders and customers.’’