- We maintain our HOLD call on Maxis but raise our DCF-derived FV to RM7.00/share (from RM6.70/share previously) as we rollover our valuation base to FY15F.

- Maxis’ core 3Q14 earnings came in at RM450mil (ex- RM43mil net accelerated depreciation and RM44mil staff cost reversal). This brought 9M14 core earnings to RM1.4bil, which was within expectations and accounting for 76% and 75% of our and consensus’ full-year estimates.

- Normalised 3Q14 earnings fell 18% YoY and 6% QoQ. Revenue fell 8% YoY and 1% QoQ, while EBITDA fell 2% QoQ (+2% YoY). Service revenues were flattish QoQ as the marginal 0.2% growth in voice revenues were offset by a 0.7% decline in data revenue. Ex-SMS, data revenue would have been up 2% QoQ and 8% YoY (which still looks weak in relative to Digi’s data revenue growth of 10% QoQ and 40% YoY).

- EBITDA margins deteriorated by 40bps QoQ to 51.8% as sales and marketing spend crept up. This is in line with guidance and it is expected to persist at least through 4Q14.

- Positively, the slide in prepaid subs base has stabilised in 3Q14 with a marginal growth of 0.4% QoQ (vs. -2% QoQ in 2Q14). Prepaid ARPUs were also up mainly due to better take up of mobile internet passes. This is in line with the increase in smartphone adoption (+5ppts to 54%) driven by penetration of low-to-mid-tier smartphones.

- The new postpaid ONE plan (which is focused on data pricing) generates much higher ARPUs than Maxis’ existing average ARPUs. However, 3Q14 postpaid ARPU still contracted for two reasons:- (1) ONE plan has yet to account for a substantial share of total subscribers; and (2) the re-pricing impact of Pay-Per-Use charges, which effectively lowers data rates.

- Management is quite happy with Maxis’ current subs position; going forward it will be more focused on driving ARPUs and expanding offerings under the Maxis ONE plan. FY14 guidance of a 4% fall in service revenues, stable EBITDA margins and RM1bil capex are still intact.

- Valuations are not cheap at close to 1 standard deviation above historical average – valuation might have priced in current attractive yields and a potential turnaround prospects. In the near term, Maxis could possibly be at a disadvantage in a spectrum refarming given that it already has the largest blocks of lower band spectrum. Additionally, growth in data revenue is still insufficient to offset the fall in voice/SMS revenue; ongoing network modernisation means more accelerated depreciation over the next 12 months, while dividend yields are likely to deteriorate from FY15F onwards.

Source: AmeSecurities