Investment Highlights

• We downgrade our recommendation on Maxis to UNDERWEIGHT from HOLD with a lower DCF-derived fair value of RM5.20/share (from an earlier RM5.65/share), based on a WACC discount rate of 6.4% and a terminal growth rate assumption of 2%, implying an FY19F EV/EBITDA of 12x and on par with its 3-year average.

• With 3QFY18 results likely to be announced on 18 October, we have reduced FY19F-FY20F earnings by 4% on expectations of a more significant impact from the loss of U Mobile roaming revenue, which has contributed annual revenues of RM300mil in the past. Our new FY19F-FY20F earnings are now 10%-14% below consensus.

• Recall that U Mobile will be terminating Maxis’ 3G radio access network (RAN) arrangement over an 18-month period, ending on 27 Dec 2018. However, the impact has been minimal over the past 4 quarters since Maxis’ announcement in June last year, as U Mobile was fully utilizing the RAN arrangement up to 2QFY18.

• We understand that the impact will be more noticeable in 3QFY18 and increasingly substantive in 4QFY19. Management hopes to mitigate the full FY19F impact by expanding its home fibre business and fixed enterprise solutions, which rely on TM’s High Speed Broadband network.

• Even if the group could ramp up revenue growth from the home fibre and fixed enterprise segments, we do not expect the lower margin from these operations to be able to offset the immediate loss in the RAN roaming revenue.

• Additionally, these margins are being squeezed even more as fixed broadband prices have been cut against the backdrop of the government’s agenda to “double the speed at half the price”.

• While Maxis’ mobile revenue growth trajectory remains flattish given the intense price war being waged by its peers, Maxis’ reliance on TM’s network exposes its vulnerability in home fibre and fixed enterprise solutions.

• Beginning last month, Maxis lowered its fibre broadband prices for both consumers and businesses by 36%-65% and offered speeds of up to 100Mbps under the new packages.

• Maxis offers these new deals even though the Mandatory Standard on Access Pricing (MSAP) structure, which will reduce wholesale fibre prices for third-party operators, has yet to be finalised. With the new MSAP prices, management affirms that the home fibre business remains value-accretive.

• Nevertheless, we expect higher down-trading activities as customers opt for the lower priced packages at these new higher speeds amid an increasingly competitive fixed broadband market.

• With earnings expected to decline from 2HFY18 onwards, we view the premium FY18F EV/EBITDA of 13x vs its 3-year average of 12x as unjustified.

Source: AmInvest Research - 3 Oct 2018