3Q15 earnings came in broadly in line. Maintain SELL and DCF-based MYR5.70 TP (14% downside) due to the stock’s rich valuation. Maxis posted commendable service revenue growth, driven by higher migrant worker share and data uptake in the prepaid segment. That said, we note that cost pressures would likely persist amid a weak MYR, higher device subsidies and network expenses anticipated in 4Q15.

Within expectations. Maxis’ 9M15 core profit of MYR1.38bn (-7% YoY) came in line at 73%/71% of our/consensus numbers respectively. 9Mmobile service revenue posted decent 3.4% YoY growth (1H15: +2.6%), underpinned by strong prepaid segment growth and consumption adjustments post goods and services tax (GST). That said, 3Q EBITDA margin fell to 47.1% (2Q15: 52.2%) as it was hit by higher international direct dialling (IDD) interconnect charges on the weaker MYR and increased network operations costs. Capex was higher at MYR359m (2Q15: MYR260m) as Maxis continues to expand its LTE coverage. A 5 sen net DPS was declared, bringing cumulative DPS to 15 sen.

Cost pressures remain. 9M prepaid revenue grew 7.2% on rising data usage, higher minutes of use (MOUs)/user and increased migrant market share. Although prepaid ARPU was stable at MYR35, 3Q15 saw subscriber (sub) numbers contracting by 124,000, reflecting the intense market competition. Postpaid ARPU was stable at MYR97, driven by anincreasing take-up of MaxisONE Plan. Management has reaffirmed its low single-digit service revenue growth guidance. However, we note that EBITDA margin is likely to remain under pressure as: i) Maxis’ network operations cost is likely to remain high as we expect it to frontload some expenses from its ongoing network modernisation exercise, ii) the weak MYR could lead to further escalation in IDD traffic charges as it gains further traction in the migrant worker segment, and iii) high device subsidies from the 4Q15 iPhone 6+ and iPhone 6S+ launch.

Maintain SELL. No changes to earnings forecasts. We keep our DCF-based MYR5.70 TP (WACC: 8.0%, TG: 1.5%). Maintain SELL as we believe that the stock remains most vulnerable to the yield reversal theme among local telcos. This is because its capex intensity remainshigh with dividends capped at a maximum of FCF as well as the unrelenting market competition. We note that Maxis continues to trade at a premium to the other cellcos at 26.1x FY16F earnings vs peers’ 21.7x.

Key takeaways from the results call Maxis’ 3Q15 results call was hosted by CEO Mr Morten Lundal and CFSO Mr Nasution Mohamed. Management reaffirmed its headline revenue and EBITDA guidance. Full-year capex guidance has now been revised to MYR1.2bn-.3bn (from MYR1.1bn) as Maxis continues to aggressively expand its LTE footprint.Competition is still a threat. Maxis has echoed DiGi.Com’s (Digi) (DIGI MK,NEUTRAL, TP: MYR5.80) view that competition is likely to remain intense over the near term. Management is still confident that its product offerings are attractive enough without the need to throw prices. That said, Maxis has been pricing its IDD rates for its #Hotlink prepaid plan rather competitively (especially for South-East Asian destinations) in an effort to gain more migrant worker share. We note that thiscould eat into its margins in this rising cost environment. We note that the conversion to MaxisONE Plan has been slower than expected. Only about 18% of its 2.8m RGS30 subs (this is defined as revenue generating subs and excludes those inactive for more than 30 days) on the plan presently. This is because the market continues to be flooded with cheaper data-centric postpaid plans such as Digi SmartPlan and UMobile’s Hero Postpaid P70 plan.

High capex intensity to boost LTE coverage. Maxis is to continue to spend aggressively on expanding its LTE network coverage. The company is expected to spend c.MYR400m-500m of capex in 4Q15 to expedite its LTE coverage. Maxis’ LTE coverage stood at 55% in 3Q15 (2Q15: 41%) when compared with Digi’s 50%. Wenote that its efforts to boost LTE usage has started to bear fruit as seen from the increase in data usage from its prepaid segment . W ith LTE data usage currently standing at about 2.3 gigabyte (GB) per user (2Q15: 2.2GB per user), this couldpresent more opportunities to further monetise data.

Forecasts. Unchanged. Key risks. Key risks to our call include: i) upside surprise in dividend payout, ii) better-than-expected growth, and iii) more subdued competition.

Maintain SELL. We maintain our SELL call on Maxis with our DCF-based TP unchanged at MYR5.70 (WACC: 8.0%, TG: 1.5%), as we believe that: i) the stock remains most vulnerable to the yield reversal theme among the local telcos with its dividend payout capped at FCF, and ii) there are concerns over escalating price competition in the market.