Maxis’ 9MFY13 results suggest that it continued to manage costs well, which helped to minimise pressure on EBITDA margin due to a one-off career transition scheme (CTS) cost. With management’s lower revenue growth  guidance  of  2-3%,  we  maintain  our  view  that  earnings  growth will  remain  tepid in  2013. Without  a strong  earnings  growth  profile, we think the stock will likely underperform amid rising bond yields.

- Within  expectations.  Maxis’  9M13  core  net  profit  of  MYR1,627m (+3.9%  y-o-y)  was  within  our  and  consensus  expectations,  accounting for 78% and 76% of full-year estimates respectively.

- Service  revenue  nudges  down  sequentially.  Q-o-q,  3Q  headline revenue  was  lower  (-2.4%)  mainly  due  to  sharply  lower  device  sales  (-52.4%)  as  management  scaled  back  on  outright  device  sales,  which offer low margins. In addition, service revenue (ie excluding device sales that  comprise  2.0%  of  headline  revenue)  eased  0.8%  q-o-q  as  data growth  (+3.1%)  was  insufficient  to  mitigate  further  SMS-to-data substitution  despite  voice  being  stable.  The telco’s 3Q  core  EBITDA margin  (excluding  a  one-off  career  transition  scheme  (CTS)  cost amounting  to  MYR102m)  improved  by  0.7  ppts  q-o-q  to  51.5%,  mainly due  to  lower  outright  device  sales.  Together  with  a  higher  effective  tax rate, core net profit declined 1.8% q-o-q.

- Briefing  highlights. While  unable to share  in detail his  future  plans for Maxis, CEO Mr Morten Lundal hopes to revitalise the group’s position in the  prepaid  segment  and  regain  its  market  share.  In  addition, management intends to turn Maxis into a high-performance organisation. Besides,  management  lowered  its  2013  revenue  growth  guidance  to  2-3% (from the mid-single digits), which partly reflects its decision to scale down on outright device sales, which offer low margins. EBITDA margins remained  very  healthy  (despite  the  one-off  CTS  cost)  due  to  continued cost discipline but appear unlikely to improve further. 

- Dividends. Maxis declared a third interim net DPS of 8.0 sen (translating into a 3Q EPS payout ratio of 127%). For FY13, we estimate DPS at 40 sen.

Briefing highlights

Outlook. Maxis’ new CEO, Mr Morten Lundal, participated in the call for the first time since he joined the group in 1 Oct to discuss 3Q13 results. Mr Lundal was unable to share in detail his future plans for Maxis, which is understandable since it has been only a month since he joined the firm.  In  an  overview,  management  said  that  revitalising Maxis’ position in the prepaid segment  and  regaining  market  share  are  among  its  priorities.  In  addition, management intends to turn Maxis into a high-performance organisation. This would depend  on  execution,  which  we  believe  may  hopefully  be  achieved  after  the  group reorganised its corporate structure and undertook a career transition scheme in mid-2013. 
 
Guidance.  Management  lowered  its  2013  revenue  growth  guidance  to  2-3% (previously  mid-single  digit),  which  partly  reflects  its  decision  to  scale  down  on outright  device  sales,  which have  low  margins.  Device  sales  fell 25.2%  y-o-y  in 3Q, resulting in non-voice revenue growing just 1.0% y-o-y in 3Q – significantly below our 7-8% y-o-y estimate to achieve its previous mid-single digit revenue growth guidance. There  is  no  change  to  its  EBITDA  margin  guidance,  which  management  expects  to remain stable (FY12: 48.6%). We see little downside to Maxis’ EBITDA margin, as it stood at 48.7% in 9M13, even after including the MYR102m career transition scheme cost.  
 
Cost  management.  Its  9M13  EBITDA  margin  stood  at  48.7%,  which  was  relatively strong.  Lower  marketing  expenses  have  been  a  key  factor  for  the  healthy  EBITDA margin.  Maxis’ continued  cost  discipline  has  also  helped  keep  the  general  and administrative  costs/revenue  ratio  at  the  lower  end  of  the  6-8%  range  over  the  last two quarters. We  maintain  our  EBITDA  margin  forecast  of  49.0%,  as  management  believes marketing expenses could normalise to higher levels to stimulate revenue growth.   
 
Home segment. There was an uptick of just 7.0k net additions in 3Q13 (2Q: 5.3k) for Maxis’  home  service  (ie  Maxis-Astro  fibre  with  IPTV  service),  bringing  total cumulative  home  service  subscribers  to  41k.  This  was  in line with management’s earlier indication that the fine-tuning work was largely done, and the company should, therefore, see better subscriber growth traction in 2H. 
 
U  Mobile.  For  3Q,  Maxis  booked  revenue  of  MYR49m  (1H:  MYR86m)  from  radio access  network  (RAN)  sharing  and  nationwide  2G  roaming  fees  from  U  Mobile. Therefore,  management  will  likely  exceed  its  initial  FY13  guidance  of  MYR130m-150m,  although  this  would  not  lead  to  any  material  changes  to  our  earnings forecasts.

Risks

The  risks  include:  i)  stronger-than-expected  net  adds,  ii)  better-than-expected execution, eg network upgrades and expansion, and iii) less intense competition.

Forecasts

We maintain our forecasts.

Valuation and recommendation

We  maintain  our  NEUTRAL  recommendation  on  Maxis,  with  our  DCF-derived  FV unchanged at MYR5.90 (WACC: 8.6%, terminal growth rate: 1.5%). Given the lack of earnings growth, Maxis’ appeal has always been its relatively generous dividend 
yields. However, without a strong earnings growth profile, we think the stock will likely underperform amid rising bond yields.

Financial Exhibits

Financial Exhibits

SWOT Analysis

- Maxis together with Astro launched Astro B.yond IPTV (internet protocol television) on 30 April 2013

Company Profile

Maxis is the largest mobile operator in Malaysia and the country’s only integrated communications service provider.

Recommendation Chart

Source: RHB