Maxis Berhad - Weak signals? HOLD

- We maintain our HOLD rating on Maxis, with an unchanged DCF-derived fair value of RM5.50/share following the release of its 1Q12 results last night.

- Maxis reported a net profit of RM572mil for 1Q12. Excluding last mile broadband tax incentive of RM16mil, normalised net profit was registered at RM557mil. This would be broadly in-line with expectations, accounting for 22% of our estimate and 24% of consensus. EBITDA of RM1.1bil also accounted for 22% of our forecast. Depending on 2Q12 strength, we see risk of earnings cuts in the coming quarters.

- Earnings rose 3% YoY, while revenue improved 4.5% – driven mainly by non-voice revenue (+13% YoY) which now accounts for 46% of mobile revenues. However, in the voice segment (-1.8% YoY), Maxis continues to lose market share in both the postpaid (subs: -2% YoY) and prepaid (-0.3% YoY) segments. Blended MoUs (minutes of usage) dipped 3% YoY and 3% QoQ, which is, the 3^rd  consecutive quarterly drop. Maxis highlighted that this was due to the delayed effect of its re-tariffing initiatives (implemented in Feb-Mar 2012) and that subscriber numbers are expected to rebound in the next 2 quarters.

- We see risk of margin dilution from Maxis’ aggressive stance on pricing. While management stated that the pricing strategy is carefully planned, there is no telling of competitor reaction and on how bad the price war can get, from an industry perspective. We see this as a key de-rating catalyst.

- We see lesser threat to TM’s Unifi now as Maxis indicated that its price undercutting strategy for fibre broadband is only temporary and  a measure to stimulate early subscribers. However, Maxis aims to compete via bundles when it introduces IPTV (no JV with Astro) as part of its fibre broadband package. As of end-1Q12, Maxis has captured 5.2K fibre broadband subs.

- Management is committed to a 40 sen dividend payout for FY12F. We believe attractive dividend yields of 6.5% will support share price. However, risk of EBITDA margin dilution and the same reaction by competitors to further reduce tariffs may put Maxis’ ability to pay dividends at risk. Furthermore, valuation is already at an 11% premium to sector average EV/EBITDA of 8.7x amid a more intense competitive environment and heightening risk of margin erosion. We recommend investors switch to TM (BUY, FV: RM5.90/share) and Axiata (BUY, FV; RM5.90/share) to ride on broadband growth and regional/acquisitive growth respectively amid stiffer competition in the local mobile telco sector.

Source: AmeSecurities