Highlights

Local dailies reported that massive internal organization restructuring is underway even in the absence of CEO.

The objective is to flatten the existing structure to improve agility and flexibility in response to the ever changing demand of the telco industry.

The source stated that the reorganization is a significant and pro-active step to fix the structure and assign people to the right jobs and allow the CEO to start on a clean slate.

This may lead to departures of 6 senior leadership team members, including:

1. Mohamed Fitri bin Abdullah, Head of Enterprise and government business;

2. Erbu Dorman, Head of Home and Broadband Business;

3. Chow Chee Yan, Head of Internal Audit;

4. Stephen John Mead, General Counsel;

5. Sophia Lim, Head of Sales and Service; and

6. Alex Ford, Head of Customer Development.

Comments

We welcome this development positively as it tones down our earlier concern that the release of Johan Dennilend would derail the hasty structural reorganization and the acting management team has proven to be prudent and competent in their execution.

This news came within our expectation as we have been reiterating since Sept 2012 that workforce rationalization is a catalyst to Maxis future growth.

We concur the source’s view that this should have been done earlier to reduce redundancies, breakdown silos and eliminate duplications which had been accumulated over the years.

Our channel check also revealed that another division head may be leaving Maxis as well, elevating the total to 7.

Although this news may appeal negatively on the surface, we believe this will bear fruit in the longer term. Moreover, there is limited downside risk on the back of Maxis’ generous dividend distribution of 40 sen per share (RM3.0bn) for FY13, rewarding investors with the highest yield amongst Malaysian telcos at 5.87%.

Catalysts

Higher smartphone penetration boosting data ARPU, synergistic product bundling with Astro, network infrastructure outsourcing and workforce rationalization.

Stronger than expected home fibre internet take up rate.

Risks

Government / regulatory risks, execution risks, competitive risks, OTT threats (voice and messaging substitution).

Forecasts

Maintained.

Rating

BUY  TP: RM7.29

Positives - New business potential in converged services, strong postpaid ARPUs (despite recent contraction, still the highest in the industry) and smartphone penetration.

Negatives - Initially low margin fibre services would depress profitability, weak ARPUs.

Valuation

Reiterate BUY call on the stock with unchanged DDMderived TP of RM7.29 based on WACC of 6.3% and unchanged TG of 1%.

Source: Hong Leong Investment Bank Research - 5 Jun 2013