Maxis’ FY13 results were in line.  Management  guided  for  low  single-digit  service  revenue  growth  for  FY14,  and  expects  1H  to  be  relatively subdued  before  picking  up  pace  in  2H.  As  more  work  is  needed  to improve  its  distribution  network  and  branding,  these  revenue  benefits will likely accrue only in 2H. In the absence of  strong earnings growth, we  maintain  a  SELL  on  the  stock.  Our  top  pick  for  the  sector  is  Digi (DIGI MK, BUY, FV: MYR5.60)

- Within  expectations.  Maxis’  FY13  core  net  profit  of  MYR2,091m (+2.2%  y-o-y)  was  within  our  and  consensus  expectations,  making  up 100% and 98% of the full-year estimates respectively.

- Another  tough  quarter.  Q-o-q,  headline  revenue  in  4Q  was  lower  (-0.7%)  due  to  weaker  voice  (-2.1%)  and  SMS  (-6.3%)  amid  flattish  data revenue. Meanwhile, 3Q core EBITDA margin (excluding several one-off items  detailed  in  Figure  1)  fell  2.9  ppts  q-o-q  to  48.6%,  mainly  due  to higher costs across the board, except for staff expenses. This, combined with  a  higher effective tax  rate  of 31.8%,  led to core  net  profit declining 15.3% q-o-q.

- Briefing  highlights.  Management  guided  for  low  single  digit  service revenue growth  this year (FY13: -0.3%). Maxis expects revenue growth in  1H  to  be  relatively  subdued,  tracking  below  its  industry  growth estimate  of  5%,  before  picking  up  in  2H.  However,  as  the  company works  towards  rebuilding  its  prepaid  business,  management  has indirectly cautioned that EBITDA margin  may come under pressure due to  its  heavy  investments.  There  was  no  specific  guidance  on  EBITDA margin,  but  Maxis’ management  said  its  absolute  core  EBITDA  will  be similar to that in FY13. Management has guided for capex to potentially exceed MYR1bn in FY14  vs FY13’s MYR815m, as it intends to revamp its information technology (IT) systems in the next two years.

- Dividends. Maxis declared a fourth and final interim net DPS of 8.0 sen each. This brings its FY13 DPS to 40 sen (143% payout based on core net  profit).  For  FY13,  we  estimate  a  DPS  of  40  sen,  based  on management’s earlier guidance.

Briefing highlights

Guidance.  Management  guided  for  low  single-digit  service  revenue  growth  in  2014 (FY13:  -0.3%).  The  company  expects  1H  revenue  growth  to  be  relatively  subdued, tracking below its industry growth estimate of 5%, before picking up in 2H.  As more work  is  still  needed  in  order  to  improve  its  distribution  network  and  branding,  the revenue benefits  from  these  efforts  will  likely  pay off  only in  2H.  We are forecasting for FY14 revenue to grow by 2.4%. However,  as  Maxis  works  towards  rebuilding  its  prepaid  business,  management indirectly  cautioned  that  its  EBITDA  margin  could  be  pressured  by  its  heavy investments. There was no specific guidance on EBITDA margin; management only said the company’s absolute core EBITDA will be similar to that in FY13.

FY13  core  EBITDA  stood  at  49.8%.  We  are  projecting  a  FY14  EBITDA  margin  of 49% as we expect marketing and direct expenses to trend higher  as Maxis attempts to regain market share and boost revenue growth. Overall, we think Maxis’ operational trends still remain relatively weak, as FY13 data grew  just  0.7%  y-o-y,  but  voice  declined 5%. In comparison, DiGi’s FY13 data jumped 17% while voice was relatively steady. In the short term, DiGi may continue to grow at Maxis’ expense during the transition period. 

Capex.  Management  guided  that  capex  may  exceed  MYR1bn  in  FY14  (FY13: MYR815m)  as  it  intends  to  revamp  its  IT  systems  over  the  next  two  years.  LTE coverage, now at 15%, is expected to expand further. We  understand  that  Maxis  is  likely  to  monetise  data  by  achieving  scale  in  data through  greater  usage,  rather  than  charging  its  customers  a  premium.  In  any  case, LTE coverage remains spotty, which suggests that premium pricing is unlikely in the short term.

Home segment. There was only 9k in net additions for Maxis’ home service (ie axis-Astro  fibre  with  IPTV  service)  in  4Q13  versus  with  7k  in  3Q.  This  brought  the company’s total cumulative  home service  subscribers  to  52k.  There  was  little  clarity 
on  the  direction  of  the  home  service,  although  we  understand  that  the company’s management is renegotiating its current arrangements with Telekom Malaysia (T MK, NEUTRAL,  FV:  MYR5.50)  and  Astro  (ASTRO  MK,  NEUTRAL,  FV:  MYR3.36).  Meanwhile,  its  management  wrote  off  MYR65m  worth  of  contractual  obligations relating to the home service segment due to its weaker-than-expected performance.

Risks

These 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 FY14 forecasts and introduce our FY15 numbers.

Valuation and recommendation

We  maintain  our  SELL  rating  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’ key  appeal  lies  only  in  its  generous  dividends.  Without  a  strong earnings growth profile, we think the stock lacks catalysts, while potential pressure on margins remains a risk, depending on the intensity of competition.

Figure 1:  Results review

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Maxis is the largest mobile operator in Malaysia, and is also the only integrated communications service provider.

Recommendation Chart

Source: RHB