Following  a  YTD  share  price  decline  of  13%,  we  upgrade  Maxis  to NEUTRAL  (from Sell)  and  keep our DCF-derived FV of MYR6.00, a 3.4% downside.  We  think  a  lot  of  the  negative  news  is  priced  in  at  this juncture, unless its operational sequential improvements fade away in 2H.  While  we  expect  Maxis  to  offer  lower  dividends  for  FY15  (we forecast  DPS  of  32  sen),  the  lower  share  price  has  now  resulted  in  a relatively decent dividend yield of 5%.

Bottoming  out  in  2Q.  We  believe  that  Maxis  has  shown  signs  of bottoming  out  in  2Q,  as  service  revenue  stabilised  (+0.3%  q-o-q),following  five  consecutive  quarters  of  sequential  decline.  Y-o-y comparisons  of  Maxis’  performance  is  somewhat  distorted  following management’s decision to revise data pricing by eliminating pay-per-use data pricing for roaming and prepaid. 

Mobile  internet  still  growing  strongly.  We  think  it  has  been  a challenge for Maxis to recover data revenue lost  from revising its datapricing. However, we view the move in a more positive light in the longer term to address the issue of bill shocks that had been a sticky issue to customer  experience  in  the  past.  We  observe  that  mobile  internet revenues reached a plateau in 3Q13, but it has begun to grow again (4% q-o-q on average since 3Q13), subsequent to the launch of its free basic internet prepaid offering. 

Mid-tier  smartphones  to  boost  data  adoption.  The  continued proliferation  of mid-tier  smartphones  (from  brands  such  as  Xiaomi  and Oppo),  may  help  to  stimulate  smartphone  adoption  among  Maxis’ prepaid  users  (smartphone  penetration  rate  of  43%)  and  thus  drive further  growth  in  mobile  internet  revenue.  These  smartphones  tend  to attract less subsidies, which is a boon to margins. Maxis’ leadership in LTE coverage could be a selling point to new smartphone adopters.

Forecasts and investment case. We make no changes to our earnings forecasts  and  DCF-derived  FV  of  MYR6.00  (WACC:  8.1%,  terminal growth:  1.5%).  While  Maxis  lacks  earnings  growth  and  dividends  may taper off in 2015, we think a lot of the negative news is  already  priced in at  this  juncture,  unless  its  operational  sequential  improvements  fade away in 2H. While we expect Maxis to offer lower dividends for FY15 (we forecast DPS of 32 sen), the decline of its share price has now resulted in a relatively decent dividend yield of 5% .

Source: RHB