We maintain our SELL rating on Maxis based on our DCF (26% downside, WACC: 8%, TG: 2%) TP of MYR4.70. 1. We think 72% of its postpaid revenues could be vulnerable to price-focused, data-centric competition; 2. TM-P1’s entry could prove to be disruptive and intensify the already-aggressive competition in the market; 3. We believe its commercial execution may have been hampered by its premium MaxisONE plan on the back of rising porting-out activities.

Trying times. We remain negative on Maxis’ prospects as competition heats up from the impending entry of TM-P1, there is a more equitable reallocation of the 900MHz/1800MHz spectrum and an upside risk to capex/opex. Our valuation implies 8.8x FY16F EV/EBITDA. The stock is currently trading at 13.8x FY16F EV/EBITDA, a premium to the industry average of 10.4x.

ARPU likely to come under pressure. Although its blended ARPU held up better than that of its peers in 4Q15, we believe its mobile service revenue could face headwinds in subsequent quarters. We estimate some 78%/72% of Maxis’ postpaid subscribers/revenue could be vulnerable to price-focused, data-centric competition in the market. The recent launch of cheaper MaxisONE postpaid plans in East Malaysia and its contentious marketing campaigns (played out over social media) may have impacted its brand equity and could manifest in higher churn in the months ahead. TM-P1 could tilt the enterprise share. We believe the introduction of TM-P1’s mobile service (targeted for 13 Apr) could prove to be disruptive. Typical of a new entrant, TM-P1 is likely to undercut prices to gain market share. In our view, Maxis’ sizeable enterprise customer base would render it susceptible to competition from TM-P1 in the longer term, should the latter decide to leverage on its stranglehold on the enterprise fixed-line market to cross-sell and bundle mobility solutions.

Spectrum. The Government is set to announce details of the spectrum payouts by Aug 2016. We think spectrum fees should be manageable, as the Government has accounted for the industry’s heavy capex requirements. However, there is upside risk to capex/opex as Maxis may need to spend to retune its radio/transmitters and optimise its network to make up for the spectrum shortfall. The company has the highest net debt/EBTDA among the mobile operators, at over 1.8x. Risks to earnings. We make no changes to our earnings forecast. Risks to our recommendation include better-than-expected net subscriber growth as well as a slower-than-expected decay in its ARPU.

Financial Exhibits

SWOT Analysis

Source: RHB Research - 8 Apr 2016