- We maintain our HOLD call on Maxis after it released its 1Q14 results last night. Our DCF-derived fair value is maintained at RM7.30/share. Maxis’ 1Q14 core earnings came in at RM513mil, which accounted for 26% of our full-year estimate and 25% of consensus. Top line and EBITDA accounted for 22% and 24% of estimates respectively.

- EBITDA margins were stronger (at 50.6% vs. 48.2% in 1Q13), mainly due to lower marketing spend, but might see some erosion in 2H14 as marketing campaigns pick up. Marketing expense should normalise to account for 5% of revenue from 3.4% in 1Q14. Management is still sticking to its full-year guidance of a flat EBITDA growth.

- Revenue and EBITDA were weak in 1Q14, falling by 9% and 4% YoY respectively. Core net profit was down by a less severe 1.5% YoY, given the smaller accelerated depreciation recognised (RM29mil vs. RM45mil in 1Q13).

- Service revenue was down by 5% YoY - Maxis blamed mobile revenue (accounting for 96% of service revenue) shrinkage (-6% YoY) on elimination of pay-per-use and prepaid data schemes as it thinks pricing of such products are not sustainable in the long run. These have been replaced with data passes for roaming and free internet plans for prepaid late last year.

- Subscriber trends are still slipping (net churn of 97mil subs), but management attributed this to WBB in part, whereas actual subs have begun to show some signs of “stabilisation”.

- The group has secured a RM2.5bil financing facility, out of which RM1bil will be used for refinancing, and another RM1.5b for capex and working capital. We have made minor adjustments to our forecast (-0.9%) to factor in higher interest expense, though it is still unclear how exactly Maxis will utilise the net RM1.5bil proceeds from the borrowing. In part, these might be used to support dividend payout, we think.

- However, post-debt drawdown, Maxis is likely to get closer to its 2x net-debt to EBITDA ceiling, which means it will likely refrain from further leverage. Maxis announced a dividend of 8sen in 1Q14 in line with prior trends, but management is guiding that dividends going forward will be closer tied to FCF rather than the absolute 40sen/share it has paid out for the past few years.

- There is no sign of aggression in expanding 3G coverage as focus is more on enhancing services rather than widening coverage. 4G LTE target is to double pop coverage to 30% by year-end from 15%. Generally, FY14 is a gestation year, it remains to be seen if Maxis can effectively address its prepaid segment in particular (an area that it has lost a lot of market share). While there seems to be an indication of dividend risk, we leave our projections unchanged for now. We project improvements in Maxis’ FY15F earnings, suggesting that an improved FCF could help sustain the current levels of dividend payout.

Source: AmeSecurities