Maxis - Revenue momentum improves, earnings yet to bottom HOLD, 28 Apr 2015

We maintain HOLD on Maxis with an unchanged fair value of RM6.70/share. Maxis reported 1Q15 core net profit of RM453mil, which was in line with expectations – accounting for 24% and 23% of our and consensus estimates, respectively. Maxis bucked the trend by registering a QoQ revenue growth (against a seasonally strong 4Q) but this has to be taken into context with the flattish-to-negative sequential growth seen through most of FY14.

On a YoY basis, Maxis turned in positive service revenue growth (+3.6% YoY) after at least two years of contraction – in line with improving operational parameters since 4Q14. EBITDA is still registering a YoY contraction given the margin compression. The improvement in revenue mainly came from the prepaid segment, where subs growth remained elevated with considerable gain in the migrant segment. Although there was an extent of price competition, the higher volumes still resulted in a net improvement in Maxis’ prepaid revenue (+9% YoY). However, postpaid revenue was still impacted by data re-pricing (-2% YoY) undertaken in mid-FY14, although notably, Maxis has been registering net churn in its postpaid subscriber base since 4Q13.

Management is intent on further growth. Given the rapid increase in subscriber base and usage volumes, it indicated of possibilities of raising capex moderately higher than the current guidance of RM1.1bil. The recent announcements on a cut in broadband pricing applies only to wireless broadband (WBB), i.e. large screen mainly, and is expected to have little impact on earnings, as WBB is not a key driver for mobile internet.

Interim 1Q15 dividend of 5sen/share represents just ~60% of what was paid out in 1Q14, i.e. 8sen/share. Maxis is keeping its policy of >75% payout and FCF as a ceiling. FY15F’s dividend yield of 3.5% is decent but not outstanding vs. those in previous years. At the current valuation (14x FY15F EV/EBITDA) and projections, we think the market has well factored in the recovery in Maxis’ earnings (EBITDA growth is still expected to remain flat this year on management guidance vs. consensus’ +3.8% forecast). Furthermore, our concern also revolves around the sustainability of this momentum once Celcom returns to the market from 2Q15 onwards.