• Premature 3G agreement termination by U Mobile

• Original agreement tenure until year 2021

• Extra network capacity could be difficult to fill in

• Maintain NEUTRAL with a lower target price of RM5.80

U Mobile ending its 3G agreement with Maxis prematurely. U Mobile is terminating the Network Sharing and Alliance Agreement (NSA) with Maxis. The termination will take place in stages over a period of 18 months with full termination on 27 December 2018. To recall, on Oct 2011, Maxis and U Mobile signed an NSA to share Maxis’ 3G radio access networks (RAN) for a period of 10 years.

Extra network capacity. Following the termination, we view that Maxis may have difficulty in looking for another mobile virtual network operator (MVNO) to fill the network capacity vacated by U Mobile. This may negatively impact Maxis’ profit margins.

Impact on earnings. We are cutting FY17 and FY18 earnings estimates by -1.6%yoy and -3.9%yoy respectively as we are removing U mobile’s 3G contributions.

Target price. Following our earnings adjustments, we are revising downwards our target price to RM5.80 per share (previously RM6.12 per share). This is premised on pegging target PER of 23x, which is the average low PER of the group over the past four years, against FY18EPS of 25.2sen.

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. 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 and cash generating capability, we view that dividend yield would come in below 4%. As we do not see plausible rerating catalysts in the foreseeable period, we maintain our NEUTRAL recommendation.

Source: MIDF Research - 29 Jun 2017