FY15 results were within expectations, making up 101%/102% of our/consensus estimates. Maintain SELL with a revised MYR4.70 TP (from 4.80, 24% downside) on demanding valuations and sub-optimal dividend yields. We believe the recent 900MHz/1800MHz spectrum allocations, which were more equitable, would heighten competition. Should there be no further spectrum awards, we opine that Maxis could incur MYR1bn-2bn of additional capex to maintain coverage.

The spectrum bummer. Maxis said its 900 megahertz (MHz)/1800MHz allocations would be reduced to 2x10MHz/2x20MHz (from 2x16MHz/2x25MHz) respectively. We believe mobile segment competition is to heighten, which would lead to ARPU pressure. This is as U-Mobile gains an additional 2x15MHz spectrum and Telekom Malaysia (TM) (T MK, NEUTRAL, TP: MYR6.80) enters the fray via its Celcom domestic roaming service agreement. Maxis still awaits further clarity from the Government with regards to its spectrum assignment fee structure. We opine too that, should no further spectrum be awarded, it could incur MYR1bn-2bn in additional capex to maintain its coverage.

Margins should come under pressure. Maxis’ MYR1.89bn FY15 core earnings (-0.9% YoY) came in line at 101%/102% of our/consensus estimates respectively. Revenue growth (+2.5% YoY) was driven by robust prepaid growth (+6.2% YoY) on a larger share of the migrant market. Postpaid revenue also gained traction, with ARPU increasing to MYR102 in 4Q15 on the growing base of its high value MaxisONE plan subscriptions. While management has guided for flat FY16 revenue, EBITDA and capex, we believe that EBITDA margins would remain under pressure. This is as Maxis’ network operations costs are likely to remain high from the frontloading of its ongoing network modernisation exercise as well as ARPU pressure from heightened competition.

Forecasts. FY16F-17F core earnings are marginally trimmed by 1-2% after updating our capex assumptions. Upside risk to our call includes less-intense-than-assumed competition. A fourth interim dividend was declared, taking full-year payout to 20 sen/share (50% of FY14), an uninspiring 3.3% yield. Maintain SELL. We believe: i) the more equitable reallocation of the 900MHz/ 1800MHz spectrums would lead to heightened competition that should crimp ARPUs; ii) should there be no further spectrum awards, Maxis could incur up to an additional MYR1bn-2bn of capex; iii) the stock remains most vulnerable to the yield reversal theme among the local telcos, as capex intensity remains high with dividends capped at a maximum of FCF; and iv) Maxis has the least favourable balance sheet among local telcos, with net D/E at 2x, more than 2x the industry average. Maintain SELL with a revised DCF-derived MYR4.70 TP (24% downside, 8% WACC, 2% TG) with an implied 8.8x FY16F EV/EBITDA. The stock is currently trading at 13.4x FY16 EV/EBITDA, a premium to the industry average of 9.4x.

Financial Exhibits

SWOT Analysis

Source: RHB Research - 5 Feb 2016