Maxis: Watch The Margins

Maxis reported 1QFY12 results that were in line with both our and market expectations when annualized. The key highlights were continued voice erosion and the q-o-q uptick in the EBITDA margin (+210bps), which is not sustainable as A&P cost is expected to accelerate in 2QFY12 with the promotional launch of its FTTH product and increased marketing spend ahead of Euro 2012. We are keeping our estimates for now but raise our FV to RM6.00 from RM5.50 after lowering our WACC assumption to 8.5% from 9%, incorporating the higher level of debt. Maintain NEUTRAL as Maxis trades on 21.2x FY12 EPS and 18.1x FY13 EPS.  

Within expectations. The group’s core profit of RM557m was up 1.5% q-o-q (+1.6% yo-y) against a 0.4% q-o-q rise in revenue (+4.5% y-o-y) to RM2.23bn, making up 25-26% of our/consensus earnings and revenue projections. The core number excludes RM352m and RM16m booked for  the  last-mile tax incentive in 4QFY11 and 1QFY12 respectively.

Voice still weak, handset sales surged. The quarter was characterized by seasonality which led to the 2% q-o-q decline in mobile revenue (declines recorded across voice and data revenue streams), while EBITDA rose 3% q-o-q on lower A&P spending (-31% q-oq). The introduction of new prepaid plans (Bagus) and cut in IDD tariffs have had some early impact, with mobile revenue seeing the strongest y-o-y increase for 1Q since the group was re-listed, although at the expense of ARPU which fell 4% q-o-q on a blended basis. To our surprise, handset sales jumped 90% q-o-q as Maxis sold more iPhone 4S handsets during the quarter compared to its peers.  

FTTH ramping up.  Maxis activated 5,200  fiber-to-the-home (FTTH) customers as at 1QFY12. It is close to unveiling another promotion to further whet the appetite of fiber users. This comes on the heels of its recent price cuts on fiber plans which management pointed out will be for a limited period. We think the fresh promotions would include IPTV to compete with Unifi and to position for  the introduction of  new content. Maxis previously inked an agreement with Australia’s Fetch TV for IPTV and is still in talks with Astro. Home revenue (where FTTH accounted for the bulk of) doubled its contribution qo-q to RM8m but the surge in subscriber acquisition cost led to a wider EBITDA loss of RM22m in 1QFY12 from RM19m in 4QFY11. Maxis did not disclose the acquisition cost per sub for FTTH, but we think it is incurring a loss at the gross level to drive take-up.  

Capex spending likely to trend lower from FY12. Maxis has maintained its capex guidance for FY12 of under RM900m (FY11: RM1bn) with spending back-loaded into 2H2012. It spent RM78m in 1QFY12, 25% of what it forked out in 4QFY11, which coincided with the network modernization and transitioning into LTE.

Source: OSK