MAXIS has entered into a strategic partnership with ASTRO to provide fibre broadband bundled with TV content. This provides new and existing customers a more affordable pricing for both services, which leans to expand MAXIS’s broadband user base, albeit not as large as its mobile segment. However, we expect meaningful earnings only in the longer term. Hence, we leave our UP call with our DCFdriven TP of RM4.90 unchanged for now.

Packaging a value-for-money deal. MAXIS and ASTRO have announced a strategic marketing partnership between both parties to offer bundled broadband with content. ASTRO will launch new bundles of MAXIS’s 30 Mbps and 100 Mbps broadband and content packages which could save customers up to RM720 on a 24-month contract

(refer to overleaf). Existing subscribers of either service appear to be able to seamlessly repackage their current plans to accommodate the new bundles.

A win-win situation. Overall, we are positive on this development as this allows both companies to leverage their individual strength and create new revenue streams by introducing new customers. For MAXIS, this means potentially higher subscription for MAXIS’s Broadband segment given its better value proposition (broadband with content). Subsequently, ASTRO could tap into a bigger customer base to address its gradually declining subscription revenue through: (i) upselling better TV packages, and (ii) promoting its home shopping segment (Astro’s Go Shop) which is accessible in all its TV packages. MAXIS could further see a surge in demand for data as more engaged customers could utilise the portable Astro GO mobile platform. Additionally, synergies from here could open up to less marketing needs and a larger pool of paying customers should translate favourably to group earnings.

Paths converging. The move is in-line with the group’s 2023 plans to evolve into a leading converged communications provider. To recap, the group aims to achieve targeted service revenue of RM10.0b by then, with productivity gains of RM1.0b. The partnership also appears timely in silencing ongoing market talks on a potential merger between both companies. By the looks of it, we believe that this partnership would have been more ideal as opposed to consolidating the two companies as both shareholders’ interests remained intact. While any positive traction from this would undoubtedly benefit the group, it may not overwhelm its bread and butter mobile prepaid and postpaid business (c.80% of revenue) with c.10m subscribers as opposed to c.276k home fibre connections in 2Q19. Hence, we make no changes.

Maintain UNDERPERFORM and DCF-driven TP of RM4.90. Our target price (based on WACC: 8.8%, TG: 1.5%) implies a 12.0x FY20E EV/Fwd. EBITDA, which is close to the stock’s -1SD over its 3-year mean. While the group continues to keep a focused approach with its capex plans and investments, the group is sidelined by fundamentally better peers (i.e. DIGI with stronger margins, dividend yields and ROE). Additionally, merger talks are driving investors’ interests towards other players.

Risks to our call include: (i) higher-than-expected service revenue growth, (ii) lower-than-expected OPEX, and (iii) less aggressive competition.

Source: Kenanga Research - 16 Aug 2019