1Q15 earnings came in line with estimates. Maintain NEUTRAL with DCF-based TP revised to MYR6.50 (9% downside). The dividend themethe stock is known for appears to be losing its appeal, as future payouts will be capped at FCF and conditional upon capex. We trim our FY15-17 core earnings slightly to factor in slower revenue growth.Maxis will also likely continue to see flattish growth over the short term.

• No surprises. Maxis’ 1Q15 core net profit of MYR455m (-11.3% YoY,8.6% QoQ) came in line at 25%/23% of our/consensus estimatesrespectively. Revenue continued on its slow growth trajectory, increasing by about 1% YoY and QoQ, driven by mobile internet revenue, which we believe is still growing by double digits YoY. EBITDA margin for the quarter was stable at 49%, although YoY PAT saw a decline due to the accelerated depreciation for 1Q15. Maxis has declared a 5 sen DPS for 1Q15 (lower than the regular 8 sen payout), representing 82% of core net profit.
• Briefing highlights. Maxis has guided for low single-digit service revenue growth, underpinned by the growth in its prepaid segment andstronger contribution from its MaxisONE postpaid plan. That said, we believe the guidance has yet to fully factor in the impact of the goods and services tax (GST) and, thus, could pose some downside to its revenue and EBITDA growth projections. Management also guided for possibly higher capex than the MYR1.1bn guidance to ensure that the subscriber experience on its network is second to none.
• Downside risk to dividends. We expect Maxis to only pay out about 75-80% of its core net profit as dividends for FY15. Furthermore, with capex potentially higher for the year, there could be some downside risk to future dividend payouts. As such, we have revised our FY15F DPS to 22.1 sen (from 30 sen), implying a yield of 3%.
• Earnings forecasts. We have trimmed our FY15-17 core earnings forecasts by 2-3% after factoring in slower service revenue growth going forward, in light of the more challenging environment.
• Maintain NEUTRAL. Our DCF-based TP is revised slightly to MYR6.50 (from MYR6.55) after our earnings revision. We believe Maxis is fairly valued as earnings upside will likely be limited due to the continued decline in legacy revenues and the competitive telco landscape.

Briefing highlights Maxis hosted a conference call following the release of its 1Q15 results. The session was hosted by CEO Mr Morten Lundal and CFO Mr Nasution Mohamed. Management shared its guidance and outlook for 2015 during the call. The telco was the first to do away with the usual breakdown on voice revenue, data revenue and minutes of usage (MOU), as it no longer sees the interpretation of the num bers as meaningful due to the higher take-up of bundled plans.

Short-term growth prospects still unexciting. Maxis has guided for service revenue to continue on its positive growth trajectory, albeit in the low single-digit growth region, underpinned by the growth in its prepaid segment as well as the more meaningful contribution from its MaxisONE postpaid plan. Launched over a year ago. MaxisONE continues to gain traction and currently has about 350,000 subscribers(12.2% of its postpaid base), with average ARPU of about MYR150. We believe Maxis’ low single-digit guidance is reasonable, given that growth prospects are unlikely to be exciting due to the continued decline in legacy (SMS and voice) revenues as well as the highly competitive Malaysian telco landscape. That said, we believe that this guidance has yet to fully factor in the impact of GST and, thus, could pose some downside risk to its revenue and EBITDA growth projections. On theGovernment’s call for lower broadband charges, similar to its peers, Maxis has introduced a cheaper entry-level broadband package for its large-screen devices. That said, it believes that the wireless broadband segment will not be a material growth driver for mobile internet.

Capex could be higher than guided. Management highlighted that FY15 capex could come in higher than the base guidance of MYR1.1bn. Given the increasingly competitive telco landscape, Maxis is looking to embark on a large long-term IT transformation initiative and to further improve on its subscribers’ network experience. With the company likely to aggressively expand on its LTE population coverage (1Q15: 39%) and the further modernisation of its 2G and 3G networks (1Q15: 78%) to retain its position as the market leader, we have revised our capex estimate to MYR1.5bn for FY15 from RM1.1bn earlier.

Downside risk to dividends. Management has guided for future dividend payout of at least 75% of its consolidated PAT. Given that it will no longer be taking on more debt to pay dividends, future dividend payout will be capped at its available free cash flow (FCF). Using 1Q15’s payout of 5 sen as a guide, we expect Maxis to only payout 75-80% of its net profit as dividends. Furthermore, with capex potentially higher for the year, there could be some downside risk to future dividend payouts. As such, we lowered our FY15F DPS to 22.1 sen (from 30 sen). This implies a yield of about 3%, which trails that of its local peers of 3.4-4.4%.

Key risks Key earnings risks include: i) a lower-than-expected pickup in data revenue, and ii) competitors chipping away its market share.

Forecasts Forecasts. We have trimmed our FY15-17 core earnings forecasts by 2-3% after factoring in slower service revenue growth going forward in light of the challenging and competitive environment.

Valuation and recommendation Maintain NEUTRAL. Our DCF-based TP (WACC: 7.6%, TG: 1.5%) is revised slightly to MYR6.50 (from MYR6.55) following the earnings revision. Although we believe that Maxis’ worst days are behind it, the stock is fairly valued, given that earnings upside will likely be limited due to the continued decline in legacy revenues and the increasingly competitive telco landscape. Furthermore, the dividend theme the stock is well known for appears to be losing its appeal, with dividend payouts capped at FCF and conditional upon capex.