Maxis’ proposal to raise up to MYR5bn in Islamic MTN/sukuk is timely to address its capex needs and alleviate potential constraints on its cashflow. We make no change to our forecast, NEUTRAL recommendation and MYR6.50 TP (WACC: 7.6%, 0.3% upside). The rising competitive intensity and GST fallout could derail its revenue recovery momentum. We prefer Digi for exposure to the sector.

• MYR5bn sukuk. Maxis plans to issue up to MYR5bn in Islamic medium term notes (MTN)/sukuk to fund its capex expansion, refinance existing debt and for working capital needs. The unrated notes have a tenure ofup to 30 years.
• Our view. The MTN follows that of a similar issuance in FY12 of MYR2.45bn and does not come as a surprise, given that: i) management had earlier highlighted the upside to FY15 capex guidance of MYR1.1bn,and ii) it ought to ease the pressure on its operational cash flows. Based on a target net debt/EBITDA of 2x (1Q15: 1.5x), Maxis could raise
• MYR650m from the MTN issue, nudging its net gearing to over 1.8x from 1.6x currently. Recall that the company will no longer be funding its dividends via debt from FY15, with future payouts capped at its FCF. Key risks. We note the rising competitive activities in recent weeks, ie Celcom’s introduction of entry level postpaid plans, free smartphone offers and attractive sign-on rebates, which could put further pressure on industry ARPUs and margins on top of the goods and services tax (GST)fallout on prepaid airtime reloads. Celcom’s new Magic prepaid plan (launched in early June) could throw a spanner on the recovery in Maxis’ prepaid revenue momentum (1Q15: +9% YoY) in our view, as it i a direct threat to Hotlink’s popular basic starter pack, which offers similar free internet connectivity.
• Maintain NEUTRAL with TP of MYR6.50. Maxis remains a NEUTRALbased on DCF-derived TP of MYR6.50 (WACC: 7.6%, TG: 1.5%) as we expect management to dial-back on its quarterly dividends, given the constraints on its FCF and concerns over rising competitive risks thatcould derail its recovery momentum. We prefer Digi.com (Digi) (DIGI MK,BUY, TP: MYR6.60) for its stronger revenue growth prospects, superior dividend yield and track record of execution.