• Maxis proposed to issue 300m new maxis share to raise capital

• Proceeds from the proposed exercise will be utilise to improve the group’s financial position

• No change to FY17 and FY18 earnings estimates

• Maintain NEUTRAL with a revised target price of RM6.12 per share

Private placement exercise. Maxis proposed to issue 300m new Maxis shares. This represents approximately 4.0% of Maxis’ outstanding shares of 7.5b. The issue price has yet been determined. However, according to the media, the issue price may range between RM5.52 to RM5.75 per share. The proposed private placement is expected to be completed by the end of July 2017.

Healthier cash reserve. Assuming an issue price of RM5.75 per share, Maxis can raise up to RM1.7b. With the additional cash, the group can reduce 1Q17 net debts of RM9.0b by -18.9% to RM7.3b. This will in turn improve the group’s FY17 net debt to EBITDA to 1.6x from 2x.

Rationale. The proceeds from the exercise will be utilised for the repayment of borrowings and related incidental costs within 12 months. The benefits of this will include enhanced cash flows, liquidity, interest costs savings and improved gearing levels. This will also create financial flexibility for Maxis to fund its future spectrum assignment fees, expansion plants and its growth strategy should the opportunity arise.

Impact. We are maintaining our earnings estimates at this juncture. Should Maxis successfully completed the proposed private placement exercise, both FY17F and FY18F EPS will be adjusted lower by approximately -4.0%. This will reduce our target price to RM5.89 per share.

Target price. We are revising downwards our target price to RM6.12 per share (previously RM6.65 per share). This is premised on pegging our revised target PER of 23x (previously 25x) which is the average low PER of the group over the past four years. The reduction in PER multiple reflects the challenging business environment which may weaken the group’s cash generating capability.

Maintain NEUTRAL. We applaud the group’s effort to retain its postpaid and prepaid ARPU. However, we believe that the strategy has negatively impacted the potential growth in the group’s postpaid and prepaid subscriber base. To recall, Maxis’ total subscribers have continued to shrink since 3Q15. We are of the opinion that the dwindling subscriber base would place Maxis in a difficult position to meaningfully grow its service revenue and maintain a healthy profit margin. Meanwhile, Maxis’ attractiveness as a dividend play stock has also waned due to the changes in its dividend payout policy. Based on the current dividend policy, we view that dividend yield would come in far below 4%. As we do not see plausible re-rating catalysts in the foreseeable period, we maintain our NEUTRAL recommendation.

Source: MIDF Research - 20 Jun 2017