Maxis’ earnings may face some pressures in the 2Q15 due to the recent GST hiccup in the prepaid segment in April. The issue, however, has been resolved following the recent decision made by Putrajaya to impose GST on mobile usage instead of the prepaid reloads. Capex-wise, there is a likelihood Maxis may spend more than its FY15 guidance but not significantly higher. Having said that, its future dividend payout may see some downside risks should the actual capex come in above expectation. Post the company visit, we trimmed our FY15E/16E earnings by 0.7%/0,9% after lowering our prepaid net-adds assumption. Meanwhile, we also raised our FY15-16E capex to RM1.1b-RM1.2b range with a lower targeted dividend payout ratio and thus, reducing our full-year DPS to 22.0-24.1 sen range from 26.5-27.6 sen previously. We reiterate our MARKET PERFORM call on MAXIS, but with a lower target price of RM7.06 (from RM7.16 previously) based on targeted FY15E EV/fwd EBITDA of 14.2x, representing an unchanged 1.0x standard deviation above the 4-year mean.

2Q15 earnings may likely face some pressures as a result of the recent GST hiccup in the prepaid segment in April. Having said that, while Maxis believes its earnings may come under pressure (on a sequential basis) in 2Q15, the group is still targeting to achieve its full-year KPIs (a low single digit service revenue growth and an absolute EBITDA similar to FY14 level). As of end-1Q15, Maxis’ prepaid subscribers accounted for c.73.8% of the group’s total subscriber base of 12.2m with ARPU of RM38. The prepaid segment revenue, meanwhile, contributed c.52% (or RM1.05b) to the group’s total service revenue of RM2.0b in 1Q15.

GST on prepaid mobile service is now usage-based. Communications and Multimedia Minister announced recently that the GST for mobile prepaid reloads will be imposed based on customers’ usage and GST will not be charged on purchasing reloads. The decision ended the month-long confusion that started since 1st of April. The new implementation, however, is only expected to take place after six months due to the complexity involving various parties in the ecosystem. While we believe the new ruling may lead for higher operational cost, it is not expected to be significantly higher.

Capex is unlikely to come in significantly higher than the RM1.1b mark. There is a likelihood Maxis could spend additional capex on top of the guidance (of RM1.1b) in FY15 due to further enhancement of its network quality as well as upgrading of its IT system. While Maxis is reluctant to elaborate further, it signalled that the additional capex spend will not be significantly above the guidance. We have raised our FY15E/FY16E capex to RM1.2b/RM1.1b (from RM1.1b/RM950m previously), respectively, and believe Maxis may have to spend a comparable capex, if not more, to retain its position as the market leader. Note that, Maxis’ LTE population coverage stood at 39% as of end-1Q15 and is set to rise above 50% by year-end.

Downside risk to dividends. With capex potentially higher than the guidance, there could be some downside risks to future dividend payout. To opt for the conservative side, we have lowered our FY15 and FY16 dividend payout ratio to 85% (from 93%-100% previously) to align with the 1Q15 dividend trend. We understand that Maxis’ dividend policy is set to distribute at least 75% of its consolidated PAT but capped at available free cashflow, where its definition was set at CFO + CFI – payments of finance costs.

Source: Kenanga Research - 15 May 2015