Still the leader in postpaid

Rich valuation. We affirm our FULLY VALUED rating for Maxis with a TP of RM5.10. The stock is trading at a rich valuation of 24x FY17F PE, the most expensive among Malaysian telcos. We do not believe its premium valuation is justified given the lower dividend payout and deteriorating industry dynamics as a result of intensifying competition.

Highly leveraged. Maxis is also the most leveraged Malaysian telco at 1.9x net debt-to-EBITDA (vs. 0.4-1.5x for peers). The increase in gearing level over the years was largely to fund the gap created by its annual DPS which was above free cash flow (FCF) in the past. The company has an internal gearing limit of 2.0x net debt-to-EBITDA, suggesting limited debt headroom ahead.

Another spectrum reallocation exercise might lead to cut in dividends. With existing licences of 2100MHz and 2600MHz bands expiring in April 2018 and December 2017 respectively, we believe MCMC could likely call for another spectrum allocation exercise in 2017. This could be followed by the 700MHz band. Depending on the spectrum fee and payment schedule, Maxis might need to cut dividends in order to fund this exercise.

Valuation

We value Maxis based on the DCF method (WACC 6.8%; terminal growth 1.5%) to derive a TP of RM5.10. Maxis? valuation is not cheap at 24x FY17F PE, which is at a premium to regional peers?. We maintain our FULLY VALUED call.

Key Risks to Our View

Irrational competition Given the already-high mobile penetration rate in Malaysia, any irrational competition in the market will hurt Maxis? as well as the industry?s growth.

Source: Alliance Research - 10 Feb 2017