Period  2Q14/1H14

Actual vs. Expectations Maxis’ 1H14 core net profit of RM997m (-8% YoY) came in below expectations; at 43.5% of our full-year forecast and 45.6% of the street consensus. The key culprits on our side were mainly due to the lower device sales revenue and higher-than-expected marketing expenses.

Dividends  Maxis has declared a single-tier tax-exempt DPS of 8.0 sen (ex-date: 27 Aug.), bringing the 1H14 DPS to 16.0 sen. For the full financial year, we expect the group to declare a 40.0 sen dividend.

Key Results Highlights YoY, 1H14 revenue declined by 9% to RM4.2b due to lower services revenue (-5% to RM4.2b) and nonservices revenue (i.e. device and hubbing business, -66% to RM115m). The lower services revenue was primarily due to lower voice (-4.3% to RM2.2b) and SMS (-30.7% to RM428m) earnings contribution. Mobile internet revenue, however, improved by 13% to RM1.1bm partially mitigating the lower voice & SMS usage. Normalised EBITDA, meanwhile, declined by 7% to RM2.1b while the margin improved to 50.9% (vs. 49.5% a year ago) as a result of lower traffic, device related expenses, and staff costs.

 QoQ, 2Q14 turnover slid 2% while the reported EBITDA improved by 1% to RM1.1b with a margin of 52.2%. On a normalised basis, EBIDA was marginally lower at RM1.0b (-1%) after taking into account the one-off item relating to the reversal for contract obligation (RM22m), resulting in EBITDA margin of 51.1% (vs. 50.6% in 1Q14). The margin improvement was mainly driven by lower traffic and device related expenses, in spite of an increase in S&M costs.

 Maxis recorded a total of 201k negative subscriber's net adds in 2Q14, reducing its total subscriber base to 12.4m. The higher subscribers churn was mainly led by its prepaid segment (-196k) as a result of SIM expirations from the Hotlink Youth Club & legacy plans, which are generally non-active and non-revenue generating SIMs. Postpaid base excluding WBB, however, grew by 34k QoQ. Both the Prepaid and Postpaid ARPU added RM1 each to RM34 and RM97, respectively. The incremental hike in Postpaid APRU suggested early signs of upgrade to new plans.

 Non-voice mobile revenue segment continued to be a primary revenue contributor which accounted for 42.3% of the group’s 1H14 service revenue of RM4.1b.

Outlook  Service revenue is expected to be lower (vs. flat in the previous guidance) in FY14 with a similar EBITDA margin close to the prior year (~51%).

Change to Forecasts Lowered FY14-FY15 core NPs by 2.4%-5.6%, after lowering device sales assumption and raising sales & marketing expenses forecast.

Rating Maintain MARKET PERFORM

Valuation  Our TP lowered to RM6.87 (from RM6.92 previously) based on an unchanged targeted FY15 EV/fwd EBITDA of 12.9x, representing a 0.5x standard deviation above the mean of 3-year EV/fwd EBITDA band.

Risks to Our Call Higher-than-expected margin pressure and subscribers churn.

Conference call highlights

Lower FY14 earnings guidance again. The group expects its service revenue (total revenue minus hubbing and device sales) to come in slightly lower than the prior year (vs. flattish growth guidance in 1Q14 and a low-single digit annual growth target set in 4Q13). Note that Maxis’ service revenue has slid 5% YoY to RM4.1b in 1H14 as a result of lower voice and SMS revenue. The weaker performance in the 1H was within expectations where management had anticipated its business transformation plan to cause the group to underperform in the 1H14 but pick up in 2H14.

Meanwhile, the group also changed its guidance to EBITDA margin in contrast to the earlier absolute EBITDA amount target (where Maxis had previously guided the absolute EBITDA to come in similar at FY13 number (i.e. RM4.5b)). While management is expecting the EBITDA margin to maintain at FY13 level (~51%), the lower service revenue growth target suggested that the group may record lower EBITDA (in absolute term) in FY14. This is not a surprise, given management is planning to launch more marketing campaigns moving forward to lure subscribers.

Capex-wise, Maxis maintained its FY14 capex guidance at RM1.1b, which we understand will be for strengthening its 3G services as well as widening its 4G LTE footprint. There is no change on the group targeted dividend in FY14, where Maxis aims to declare 40.0 sen DPS, subject to shareholders’ approval. Post FY14, we understand that the group’s dividends commitment will be very much depends on its free-cash-flow position.

Network modernisation progressing well. Maxis’ network upgrading (extensive single RAN migration) in key market centres (i.e. Penang, Johor, and Klang Valley) are nearing completion and it is targeting to extend its modernisation works to the 2nd tier cities by year-end. The group currently has more than 5.6k HSPA+ sites, of which 4.5k sites are capable of delivering internet speed of up to 42 mbps. Its 3G population coverage, meanwhile, is expected to reach 88% by the end of 2014.

Blended smartphone penetration rate continued to climb. Maxis’ smartphone penetration rate continued to improve which recorded 48% in 2Q14 (1Q14: 43%), thanks to higher adoption in new mid-tier smart-phones (i.e. Lenovo, Xiaomi & Oppo). Meanwhile, the group LTE subscribers’ base has further increased to 824k from over 667k customers in the preceding quarter, and it aims to expand its population coverage to 30% by end-FY14.

Home segment retained. The group has decided to carry on its home business after a review since late-2013. Maxis indicated that its wholesale arrangements (with both Astro and TM) have improved and is currently working on a strategic roadmap for the segment. The segment added 7k new subscribers in 2Q14, bringing its total subscribers to 66k with a turnover of RM29m (vs. RM25m in 1Q14). The group, meanwhile, has also provided RM22m for its contract obligations of Home services’ network in 2Q14.

Source: Kenanga