Maxis’  2Q14  results  were  in  line  but  we  think  management  may  have underestimated  the  impact to usage patterns,  following the changes in data  pricing  in  1Q14.  Hence,  management  is  now  guiding  for  service revenue to be slightly slower in FY14 vs flat growth for FY14 previously. We think there are no quick fixes for Maxis, though we believe there are early signs that Maxis may have seen the trough. 

Within expectations. Maxis’ 1H14 core net profit of MYR988.0m (-8.4% y-o-y) was within our and consensus expectations, making up 47% and 48% of full-year estimates respectively. 

Bottoming out.   Y-o-y, overall 2Q14 revenue fell by  9.2% (1Q14: -8.9% y-o-y),  partly due to  an  almost total absence of device revenue (which management says is a  deliberate strategy,  given its paper-thin margins) and the continued  decline in short message service (SMS)  (-27.2% y-oy).  Sequentially  however,  there  are  initial  signs  Maxis  has  seen  the trough  after  registering  a  0.3%  q-o-q  recovery  in  service  revenue,  as efforts  to  boost  data  usage  paid  off  –  strong  mobile  internet  growth (+8.0% q-o-q) offset continued SMS weakness. 

Briefing  highlights.  Not  too  surprisingly,  management  is  now  guiding for  service  revenue  for  FY14  to  be  slightly  lower  than  in  FY13.  We believe  this  is  partly  attributable  to  weaker-than-expected  elasticity  to recover data revenue lost, as it has  eliminated pay-per-use data pricing for  data  roaming  and  prepaid  data.  Improving  and  expanding  its distribution remains an ongoing  effort  that has yet to reach the halfway mark. On a positive note, management is seeing good take-up of mid-tier smartphones, that may pave the way for more growth in mobile internet. 

Dividends. Maxis declared a  second  interim net DPS of 8.0 sen (136% payout  ratio  based  on  core  net  profit).  We  maintain  our  FY14  DPS estimate of 40 sen, based on management’s guidance.

Forecasts. Maintained.

Investment  case.  We  maintain  SELL  on  Maxis,  with  an  unchanged DCF-derived  FV  of  MYR6.00  (WACC:  8.1%,  terminal  growth:  1.5%). Maxis lacks earnings growth, while dividends could taper off in 2015.

Source: RHB