Media Chinese yesterday proposed to distribute RM700m via a special dividend to its shareholders, or about RM0.41 per share. Of the entire proposed sum, RM200m will be funded internally while the remaining RM500m will financed by bank borrowings.

A windfall indeed. We were caught by surprise by the huge reward the company has proposed for its shareholders. Although our expectation of a capital repayment turned out to be correct, we were wrong in our assumption that the company would unlikely borrow to fund the exercise. After the capital repayment, the group's cash pile will shrink by RM200m to RM152m. The proposed 41 sen per share in special dividend as well as our 6.6 sen per share dividend estimate based on our 60% payout ratio forecast will put MCIL's dividend yield for FY13 at a generous 35%.

Balance sheet adjustment.  While the exercise date has yet to be finalized, based on the said proposal, the group's share capital and par value will be maintained while its share premium will contract by 78% to RM192.8m after the ex-date. On the other hand, it will push up MCIL's borrowings by RM500m, bringing its total borrowings to RM781.7m and net borrowings to RM397.6m.

The group can well afford the exercise.  After incorporating the half-year effect of higher interest expenses of RM15m p.a - derived from our assumption of a 6% interest expense - our net profit forecast for FY13 will come down by 10% to RM188m while our EPS will be cut to 11.1 sen from 12.3 sen previously. (Note that the group's FY14 interest expense will normalize at RM30m a year, based on an interest rate of 6% p.a) Assuming that the group maintains its 60% dividend payout this year, and after paying RM15m in interest expense as well as a projection of normal capex of RM20m, the group will still have cash of about RM75m. While investors might not favor the idea of borrowing to fund its capital repayment, we believe that the group is actually optimizing its balance sheet. Looking at its healthy balance sheet, we think it would optimize its capital mix without excessively burdening its cash flow and earnings capability. We also do not expect the group to embark on any major capex or expensive M&A activities within the next 3 to 4 years.