- We maintain our HOLD call on Maxis but trim our fair value to RM6.70/share (from RM7.00/share previously). Maxis registered core net profit of RM419mil for 4Q14, which brought FY14F core earnings to RM1.9bil. This is within our expectation and consensus, accounting for 101% and 99% of estimates respectively.

- Operationally, Maxis’s turnaround is gaining traction: (1) mobile revenue has grown for three consecutive quarters; (2) prepaid revenues has shown positive growth for three quarters with positive subs growth and stable ARPU; and (3) postpaid revenue turned around in 4Q14 on QoQ basis (but - 3% YoY).

- However, the operational and revenue improvement are not trickling down to earnings given rising sales and marketing cost, staff cost and network/traffic cost. 4Q14 EBITDA were down 7% QoQ despite a 3% increase in revenue. EBITDA margins contracted some 4.7ppts QoQ to 47%.

- We suspect winning back the prepaid subs share is driving the substantial rise in cost. Pricing too seems to have deteriorated – prepaid ARPM registered a 2% QoQ contraction (-7% YoY). It is also uncertain if the new plans launched, which entail open ended cost to a certain extent (i.e. certain “unlimited” services), are driving the rise in traffic cost.

- A negative surprise was that management is guiding for just low-single digit service revenue growth and flat EBITDA (implying a contraction in EBITDA margins) for FY15F off the already weak FY14 base. The high sales and marketing cost in 4Q14 is expected to stay as the competitive environment is expected to remain intense this year, further compounded by cheap offerings by smaller players.

- We trim our FY15F/16F EPS by 3%/2% to reflect the lower than expected guidance i.e. low-single digit service revenue growth and flat EBITDA in FY15F, partly offset by prepaid tax cost elimination post-GST. Management is factoring in increased competition in its FY15F guidance (but not GST pass on) – we suspect Maxis is expecting peers to react to its recent unique offerings i.e. “unlimited” SMS/calls for Maxis ONE postpaid, free basic internet (at 64kbps) for prepaid #Hotlink plan.

- Valuation at close to 1-std deviation above mean is inflated – reflecting market expectations of an earnings inflection in FY15F i.e. consensus’ 7% YoY EPS growth expectation pre- 4Q14 results. The weak guidance and downward earnings revisions could spell weakness for the stock in the near-term. Dividend yield is expected to fall to 4% for FY15F (from 6% in FY14) as payout is now benchmarked against FCF.

Source: AmeSecurities