- We maintain our HOLD call on Maxis, but lower our DCF derived fair value to RM6.70/share (fromRM7.30/share previously) after it released weak 2Q14 results yesterday. Maxis reported net profit of RM446mil for its 2Q14, which brought 1H14 earnings to RM930mil. This is below expectations if annualised, accounting for 93% of our FY14F.

- 2Q14 earnings fell 16% YoY on a 9% YoY revenue contraction (-11% QoQ). Service revenue fell 4% YoY mainly dragged by mobile services. Out of this, voice revenue fell 4% YoY and data revenue fell 6%. While mobile internet revenue grew 14% YoY, this was insufficient to offset a 31% drop in SMS and 27% drop in WBB revenues (See Table 2). EBITDA fell 9% YoY (-1% QoQ).

- On a brighter note, postpaid subscribers saw signs of stabilisation (+6% YoY/+1% QoQ) driven by increased smartphone penetration to 48% (+5pp QoQ) and elimination of expensive pay-per-use charges. However prepaid continued its freefall (-7% YoY/-2% QoQ). ARPUs were lower (-7% YoY) for postpaid and flat for prepaid. The new #Hotlink prepaid plan is picking up traction, but it has yet to match the ARPUs generated by legacy plans which are being churned out.

- Maxis aims to leverage on the rise in mid-tier devices via bite sized data offerings, a similar strategy employed by Digi. However, we note that the latter is already entrenched in the youth market, which is a natural target for such offerings while Maxis’ subscriber base is more focused on enterprise markets and more mature users.

- Revenue guidance was lowered again (to a slight contraction in service revenues from flat), while EBITDA margin guidance was maintained (flat YoY). Margins are likely to see pressure in 2H14 with marketing/distribution spend to creep up as Maxis steps up transformation efforts. 2H14 earnings are expected to improve on YoY basis, but this comes off a weaker base in 2H13.

- We trim FY14F-16F projections by 5%-16% to reflect lower revenue growth assumptions (-2% from +2% previously), mainly to reflect a contraction in service revenues. Our dividend assumptions are also lowered to better reflect FCF. FY15F-16F yields are now lower at 4.2%-4.7% vs. 6% for FY14F, which is still fixed at 40sen/share.

- Maxis has enjoyed yield compression throughout FY12-FY13 – valuation is now close to 1 standard deviation above the historical average. Moreover, capex intensity is rising at 12% vs. an average of 10% in past two years which gives rise to lower dividend expectations as Maxis creeps closer to its net debt/EBITDA ceiling of 2x. Fundamentally, we think Maxis may be some time away from a sustainable turnaround judging by its results.

Source: AmeSecurities