Investment Highlights

• We maintain our HOLD recommendation on Maxis with unchanged DCF-derived fair value of RM5.76/share (based on a WACC discount rate of 7% and a terminal growth rate assumption of 2%), implying an FY18F EV/EBITDA of 11x, 1SD below its 3-year average of 12x.

• The Star reported today that Ananda Krishnan, who owns a 62.4% stake in Maxis and a 40% stake in Astro, is considering a corporate exercise between the two listing entities.

• In our view, a merger would be a rational option given that both Maxis and Astro are facing intense competition on multiple fronts.

• Recall that Maxis expects continued contraction in postpaid average revenue per user (ARPU), exacerbated by the recent Hotlink Postpaid Flex which offers free unlimited calls/SMS with 1GB data at RM30/month and an option to purchase additional 5GB data for RM25/month.

• In IQFY18, postpaid ARPU fell by RM4/month to RM92/month on lower packages for shared family lines. Continued attrition from legacy subscribers and migration from prepaid contributed to Maxis One customers, rising 71K QoQ to 2.1mil while its active postpaid base fell by 59K to 2.9mil.

• Management plans to arrest the declining prepaid base and improve its blended ARPU of RM51/month with the new Hotlink plans. However, we view a likelihood of an acceleration of prepaid migration to the new more affordable flexi plans due to their similar price points with the group's prepaid ARPU of RM35/month currently.

• While Maxis currently endures increasingly competitive plans from rivals, over-the-top players like iflix and Netflix and other pay TV options such as unifi’s HyppTV drive down Astro’s ARPU and erode its subscription base, and consequently advertising revenues.

• A merger will lead to an entity with a market capitalisation of RM53bil (vs. Maxis’s RM44bil) with a combined net profit of RM2.6bil. Given Astro’s lower valuations, the merged entity’s FY18F EV/EBITDA could slightly drop to 10.3x with FY19F PE sliding to 20.8x. However, Astro’s higher FY18F net debt/EBITDA of 1.7x will cause the merged entity’s to rise slightly from 1.3x to 1.4x.

• We expect merger synergies from the convergence of Maxis and Astro’s services. For example, Maxis mobile and Home Fibre plans could be repackaged with Astro IPTV offerings, which could also be streamed to mobile devices.

• Even though this should be value-enhancing, we highlight that such a move is merely a rear guard manoeuvre to prevent revenue erosion from declining ARPUs and subscriber attrition. As such, we maintain Maxis’ forecasts pending further official announcement.

• The stock’s FY18F EV/EBITDA of 11x is almost at parity to its 3- year average, while dividend yields are decent at 3%.

Source: AmInvest Research - 20 Jun 2018