While sentiment for the broader market has improved over the past few months, thus favouring higher risk, cyclical stocks, perhaps there remain investors who are still attracted to its higher than market average dividend yields and comparatively defensive business.
Maxis has maintained annual dividends at 40 sen per share since relisting on the local bourse at end-2009. The same amount this year will give shareholders a net yield of 5.5% at the current share price of RM7.26 — which is higher than prevailing yields for the telco sector. For example, dividend yields for Telekom Malaysia Bhd (TM) and DiGi.Com Bhd are estimated at roughly 4.2% and 4.4%, respectively.
Weak earnings translate into rising valuations
However, given that Maxis' net profit has actually declined — from RM2.3 billion in 2010, its first full-year since relisting, to RM1.86 billion in 2012 — valuations for the stock would have been expanding over the past three years. At the current share price, the stock is trading at roughly 26 times our estimated earnings for 2013.
This is well above the average 15 to 16 times valuations for the broader market as well as for the other telcos. In short, unless earnings growth picks up steam significantly, it is difficult to foresee a sustained expansion in valuations going forward.
The company reported net profit of RM528 million in the second quarter of 2013 (2Q13), up from RM475 million in 1Q, despite a 1.4% drop in total revenue. The fall in revenue was due to lower device sales while the important service revenue segment was flattish quarter-on-quarter (q-o-q). Operating margin improved, bolstered by lower costs in the quarter — but costs might rise anew in the second half (2H) of 2013 on the back of higher marketing expenses and device subsidies.
Service revenue for 1H13 was up 2.1% year-on-year (y-o-y) with data revenue growing 7.5%, offsetting the 1.9% decline in voice revenue over the period. This trend will likely continue as data consumption continues to expand at the expense of traditional voice and SMS. To achieve its target of 5% top line growth, revenue will have to pick up some in 2H.
One of the company's main focuses for fresh revenue stream has been home fibre broadband services. Success has been limited, so far. After more than 1½ years, Maxis has only signed up 36,100 subscribers. By comparison, TM added 49,487 subscribers for its Unifi broadband services in 1Q.
The company ran into some teething problems since tying up with Astro to offer bundled broadband-IPTV services in May. It hopes to resolve these issues in the current quarter and gain some traction on the customer acquisition front.
For the full-year, we estimate net profit totalling RM2.08 billion — earnings for 1H stood at RM1 billion. Net profit is forecast to rise to RM2.18 billion in 2014, on expectations of better momentum in the home services segment — but this would still be below the level of earnings in 2010. As such, we foresee limited probability of increased dividends.
Higher interest rates sap growth
In fact, at the current pace of growth, there could be higher risks of lower dividends. Gearing has been on the rise, from 48% in 2010 to 102% at end-June 2013 — net debt stood at RM6.38 billion. Its net debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio is also the highest among local listed telcos.
The company has been taking on more debt to fund capital expenditure and its generous dividend payments amid the earnings decline. Raising debt is an attractive option in an environment of historic low interest rates, improving shareholder returns.
Going forward, however, global interest rates are expected to normalise and trend higher — led by the US pulling back on its bond purchase programme. Higher cost of borrowings would sap growth and hurt companies with high debt levels, such as Maxis.
Rising interest rates would also make Maxis' dividend yield less attractive by comparison. For instance, risk-free returns on the benchmark Malaysian Government securities have risen to about 3.9% currently, up from about 3.4% at end-May.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article first appeared in The Edge Financial Daily, on August 14, 2013.
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