Maxis Bhd - Margin pressure from aggressive pricing strategies Hold

- We maintain our HOLD call on Maxis following the release of its 2Q12 results. We have raised our DCF-derived fair value to RM7.40/share (from RM5.50/share) as we roll over our valuation base to FY13F.

- Maxis reported a core net profit of RM550mil for 2Q12 (normalised for RM125mil fixed asset write-off). This brings 1H12 core earnings to RM1.1bil, which missed our expectations but within consensus estimates accounting for 43% and 48% of FY12F earnings, respectively. Correspondingly, we have cut earnings by 6%-7% over FY12-14F.

- Earnings slipped 1.3% QoQ and were largely flattish (-0.2% YoY). EBITDA was also flat YoY despite a 2.7% revenue growth as margin slipped to below 50% from 51.3% in 2Q11 and 50.8% in 1Q12. 

- Voice revenues in particular slipped 2.4% YoY, which reflects the initial impact of Maxis’ aggressive price strategy to gain market share in the migrant segment. While the decline in prepaid subs seems to have been arrested (following re-tariffing initiatives), postpaid subs continue to slip (See Chart 1). 

- Management claims that it has not retaliated enough on pricing (postpaid) and segmented re-tariffing has been executed, which means further revenue and margin pressure going forward. On top of this, Maxis is also seeing competitors reacting to its pricing strategy. 

- Maxis has captured 9.4k fibre broadband subs base in 2Q12 (2% of industry gross adds) vs. 5.2K (7% of gross adds) in 1Q12. It expects to capture close to 20% of industry gross adds in 3Q12. Growth of Maxis home broadband has impacted wireless broadband subs negatively – subs have declined in 3 consecutive quarters by 4-8% QoQ (See Chart 2). 

- Maxis has secured an exclusive IPTV content supply agreement with Astro, the details of which will be revealed later this week. This may give it an advantage over TM in home broadband product bundling given Astro’s dominant position in the pay-TV space.

- An interim dividend of 16sen/share was declared, flat compared to last year – on track to hit 40sen/share GDPS (5.7% yield). However, valuations (10x EV/EBITDA, 17% premium to sector) look stretched amid increased earnings risk from aggressive moves to compete for market share. Dividend commitment of 40sen/share cushions downside, but is nothing unexpected – Maxis has enjoyed yield compression from 8% early this year to 5.7%.   

Source: AmeSecurities