Investment Highlights

• We maintain Maxis’ HOLD rating with an unchanged DCFderived fair value of RM5.50/share. This is based on a WACC discount rate of 6.3% and terminal growth rate assumption of 2%, implying an FY20F EV/EBITDA of 13x and is on par with its 3-year average.
• Maxis is initiating legal challenges to the Inland Revenue Board’s notice of tax assessment of RM140mil for disallowance of interest expense deduction and penalties for FY16–FY17.
• The group is disputing the basis and validity of the additional assessment, which accounts to a substantive 10% of FY20F earnings, as well as submitting a stay order by the court.
• Compared to the corporate tax rate of 24% from 2016 onwards, we note that Maxis’ effective tax rates were 26.5% in FY16 and 24.3% in FY17 vs. 29% in FY15.
• However, we note that the group’s effective tax rate rose slightly to 25% in FY18–FY19. Including the additional tax bill will raise the combined effective tax rate in FY16–FY17 to 28%.
• As any impact is likely to be non-recurring, we maintain our FY20F–FY22F core earnings. Additionally, the group has indicated that there will not be any imminent financial impact pending the outcome of the legal proceedings.
• Meanwhile, given the uncertain impact from the Covid-19 pandemic, management is still not confident in providing a fresh guidance following the withdrawn expectation of a “flat to low single-digit increase” for both FY20F service revenue and normalised EBITDA.
• In 3QFY20, Maxis’ overall subscribers still contracted by 618K QoQ to 11.1mil due to a much larger reduction of 683K prepaid users to 7.4mil from SIM consolidation amid ongoing intense competition.
• Additionally, the group’s home fibre ARPU slid RM2/month QoQ to RM104/month from new subscribers at a lower entry price.
• Against the backdrop of intensifying competition in the cellular and fibre market, the stock’s FY21F EV/EBITDA of 12x is slightly below with its 3-year average of 13x, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 23 Nov 2020