U Mobile is terminating its network sharing and alliance (NSA) agreement with Maxis signed in 2011. The termination would take place in stages over 18 months. While the termination is not expected to have a material effect on Maxis’ FY17 core PATAMI, it will set the stage to reduce the group’s earnings by 3%-5% over the next four years. All in, we have reduced our FY17E/FY18E core PATAMI by 1%/3% and lowered the DCF-driven target price to RM5.85 (WACC: 6.7%, TG: 1.5%). Maintained MARKET PERFORM rating.

Received letter from U Mobile terminating NSA. Last Friday, Maxis received a letter from U Mobile to terminate the Network Sharing and Alliance Agreement (NSA) pursuant to a termination for convenience option available to U Mobile under the NSA. The termination will take place in stages over a period of 18 months with completion on 27th

December 2018. To recap, Maxis has signed a landmark agreement with U Mobile on the 3G radio access network (RAN) sharing agreement (where the shared location will exclude the urban market centres, such as Klang Valley, Penang, Johor Bahru and Ipoh) in October 2011. The agreement would be for an initial period of 10 years with an option to extend for up to another two years. Note that, RAN sharing is about taking the costliest pieces of an operator’s network – the cell sites and towers, base station equipment and the transmission network – and sharing this infrastructure with competitors.

Not a big surprise overall. Despite U Mobile not spelling out the reasons of termination of the NSA with Maxis, we are not overly surprised given the former’s network usage and efficiencies are set to be improved significantly from July onwards (post the full implementation of the new 900Mhz and 1800MHz spectrum reallocation plan). Besides, U Mobile has been building its ownnetworks and expands its network coverage aggressively over the past few years. All these would allow U Mobile to expand its market share efficiently under its own-network and narrow the network gap against the big boys.

Decent contributions over the past five years. U Mobile has contributed decent aggregated revenue of c.RM1b to Maxis’ top-line over the past five years. Maxis has received c.RM335m (+35% YoY) turnover from U Mobile in FY16, where we reckon the strong performance was mainly driven by its enlarged market share. Note that, the non-top three mobile market share has surged from c.2% (as of 4QCY11) to 23% in 4QCY16, which we believe U Mobile, the fourthlargest mobile operator, was the key beneficiary.

Reduced target price to RM5.85. The absence of U Mobile contribution is expected to reduce our Maxis’ FY17E/FY18E turnover by -0.9% (half-year impact) and -3.3%, respectively. Having said that, on the flip side, the termination of the NSA could free up some network capacities to Maxis, which in-turn could generate some savings on its network operating costs. All in, we have lowered our Maxis’ FY17E/FY18E core PATAMI by 0.8%/2.7%. Correspondently, our Maxis DCF-driven target price also reduced to RM5.85/share (WACC: 6.7%, TG: 1.5%) from RM5.95/share previously.

Source: Kenanga Research - 29 Jun 2017