- We maintain our HOLD call on Maxis but lower our DCF derived fair value to RM7.30/share (from RM7.40/share previously) given the earnings cuts in this report. Maxis’ 4Q13 results were within expectations. The group reported core net profit of RM466mil for the 4Q13, which brought FY13 core earnings to RM2.1bil. This accounted for 103% of our FY13 forecast.

- Prepaid subs base continued to slide in 4Q13 (-12% YoY, -3% QoQ), while for the whole of FY13, Maxis saw a net churn of 1.2mil subs. Wireless broadband subs were down by 12% in the FY13 period, bringing total subs base down by 8.5% (postpaid: +1.3%).

- Blended ARPUs were marginally lower (-2% YTD) due to deterioration in both prepaid and postpaid segments. Postpaid ARPUs were mainly dragged by lower usage while prepaid was dragged by lower RPM (revenue per minute) (See Table 3). Losses from the fibre broadband segment widened to RM100mil in 4Q13 (4Q12: RM37mil loss); Maxis is looking to engage TM and Astro to relook at the existing commercial agreements.

- FY14F is expected to be a gestation year for Maxis – focus is not on driving margins but to drive top-line growth (in the midterm). For FY14F, management expects Maxis to grow service revenue in the low single-digit range – implying slower than industry revenue growth of 5%. Maxis is likely to underperform peers in 1H14 before gaining some traction in 2H14 as the group implements various transformation measures encompassing new products (new prepaid plans launched Nov 2013), branding, customer experience, distribution, people and incentives.

- Absolute EBITDA is expected to remain flattish vs. FY13’s, which implies margin contraction of circa 180bps to 48%, on our estimate. Maxis expects to see higher sales & marketing spend (4%-5% of revenue from 4% in FY13) as it shifts focus on driving primary subscribers in the prepaid segment. In terms of ARPU (FY14F), the postpaid segment is expected to see flattish growth to slight contraction from a move into the low- and midend segment, while prepaid is expected to see some uptick.

- We have lowered our projections by 2%-5% over FY14-15F, with FY14F EBITDA margin projected at 45% (vs. normalised EBITDA margin of 49.8% in FY13F). This is primarily driven by slower revenue growth forecast (+4%), while bottom line is now expected to contract by 4% in FY14F given the flat EBITDA levels and rising capex. Capex will increase to >RM1bil in FY14F (FY13F: RM815mil) as Maxis will be revamping its IT system. FY15 capex levels may look similar.

- Valuations are not entirely cheap (more than 1-std deviation above historical average PE, see Chart 3), but the 5.8% dividend yield cushions downside. Nonetheless, we think Digi is a better exposure to the telco sector.

Source: AmeSecurities