Maxis has accepted the letters of offer from the authority with regards to the 900Mhz and 1800Mhz spectrum assignments. The one-off spectrum fee of RM816.75m will be funded mainly via external borrowings. We have trimmed our FY16E/FY17E earnings marginally by 0.1%/0.8%, after imputing higher finance cost and direct expenses. Maintained UNDERPERFORM with an unchanged TP of RM5.80, based on targeted FY17E EV/forward EBITDA of 12.1x (representing an unchanged -1.5x standard deviation below its 2-year mean). We believe there is room for the sector PER to de-rate, should incumbents start to lower dividend pay-out/payment to preserve cash for spectrums payment.

Accept the letters of offer. Maxis has accepted the letters of offer from the MCMC for the spectrum assignments of 2 x 10MHz of 900MHz and 2x 20MHz of 1800MHz for a lump sum full settlement fee of RM816.75m.

Preferred payment mode. Maxis has decided to fund the lump sum fee mainly through external borrowings rather than through staggered payments (an alternative option suggested in the letter of offer) after a thorough consideration of all factors, including future cash-flow projections and reinvestment opportunities. The group’s gearing level (net debt/EBITDA ratio) will likely remain at approximately 2x, according to the management.

Raising funds via issuing Islamic notes. We believe the funding is likely to be raised via the recently announced Unrated Sukuk Murabahah Programme (which allowed Maxis to raise an aggregate nominal value of up to RM10b over tenure of up to 30 years) with proceeds used to finance its internal re-organisation exercise, capex, working capital requirements, general corporate purposes, as well as refinancing any Sukuk Murabahah. Maxis has issued the first series of the Sukuk Murabahah amounting to RM840m in July followed by another RM500m (second series) in late October.

900Mhz and 1800Mhz spectrums fee structure. To recap, the authority has announced the payment for spectrum in late August, which consists of: (i) a price component of RM816.75m (for both Maxis and Axiata) and RM598.545m for Digi (where companies have the option to pay full settlement or higher amounts under staggered payment options), and (ii) fixed annual spectrum maintenance fee where both Maxis and Axiata have to pay RM70.25m each while Digi needs to fork out RM51.48m for upholding the spectrums. All in, both Maxis and Axiata have to pay a total RM1.87b (for 2x10MHz in 900MHz band and 2x20 in 1800MHz) while Digi has to spend RM1.37b (for 2x5MHz in 900MHz band and 2x20 in 1800MHz frequency) to use these two blocks of bandwidth for 15 years (effective from 1 July 2017). The new pricing structure implied that the annual maintenance fee will account for c.56% (of the total spectrum price) while the balance comes from the one-off fees.

Negligible financial impact. We have lowered our Maxis’ FY16E/FY17E core PATAMI by 0.1%/0.8% to RM1.86b/RM1.91b after imputing a slightly higher financing cost as well as the direct expenses. The spectrum fee, meanwhile, is expected to be amortised through the spectrums’ useful life (i.e. 15 years). Balance-sheet-wise, the group’s net debt to EBITDA ratio is expected to surge to 1.9x by the end FY16 vs. 1.68x as of end 3Q16. Its FY16 dividend, however, is expected to be capped at 15.0 sen/share due to its FCF constraint (note that Maxis’ dividend policy is to reward its shareholders with a minimum 75% of its consolidated PAT but capped at available FCF) but is expected to revert back to 20.0 sen DPS in FY17

Source: Kenanga Research - 1 Nov 2016