MAXIS : Downgrade to Underperform with TP of RM4.80

Maxis weighed down by World Cup

Maxis Bhd (Sept 1, RM5.38)
Downgrade to underperform at RM5.38 with revised target price RM4.80 (from RM5.50): Maxis' annualised 1H2010 core net profit was 10% below our forecast and 11% below market because of weaker than expected revenue and margins. Compared with our preview, Maxis' margins disappointed.

Even when excluding World Cup-related costs which clipped two percentage points (ppts) off its earnings before interest, tax, depreciation and amortisation (Ebitda) margin, its annualised 2Q core net profit was 7% short of our FY2010 estimates. As expected, Maxis declared an eight sen dividend per share (DPS) but would not commit on a 50 sen DPS for FY2010. Given the poor results and lower management guidance, we are cutting our FY2010-12 core EPS forecasts by 7% to 8% and DPS by 14% to 20%, which reduces our DCF-based target price from RM5.50 to RM4.80.

This, coupled with uncertainties over its dividend, prompts us to downgrade our call from neutral to underperform. We prefer Celcom Axiata Bhd, our top Malaysian telco pick and XL Axiata, our regional telco pick.

In 2Q revenue rose 2.7% quarter-on-quarter (q-o-q) after adding back RM20 million provision for rebates in earlier quarters. This is ahead of Celcom's 2% q-o-q growth and DiGi.Com Bhd's circa 1% growth. But Maxis' Ebitda margin tumbled 3.4ppts due to its sponsorship of the World Cup, for which it expensed RM45 million in 2Q with another RM25 million to be incurred in 3Q.

Even after adjusting for the World Cup-related costs, Maxis' 2Q Ebitda margin slid 1.3ppts against a 2.4ppts increase for Celcom's adjusted margin and a 1.3ppts rise for DiGi (excluding iPhone subsidies). We question the long-term returns of Maxis' World Cup sponsorship.

Maxis cut its FY2010 revenue growth guidance from high single digit y-o-y to mid-single digit growth while maintaining its guidance of 50% FY2010 Ebitda margin. Revenues are affected by the commoditisation of voice, a 40% cut in mobile termination rates and likely regulator-imposed reduction of Malaysia-Singapore roaming rates.

However, we think its FY2010 Ebitda margin is likely to dip below 50%, given the World Cup related opex and subscriber acquisition costs. Maxis reaffirmed its guidance of RM1.4 billion capex — RM1.2 billion will be invested in mobile networks and RM0.2 billion in its fibre to the premises (FTTP) project.

Questions were raised during aconference call with Maxis as to whether it would commit to a 50 sen DPS, as indicated earlier by its major shareholder. The company would not commit to this figure, saying only that it is in "full alignment" with its shareholder.

We think it has the capacity to pay a dividend of this quantum and is sending the right signals with its RM4.5 billion bond sale, of which RM2.5 billion will go towards debt repayment and RM2 billion will be used for working capital/capex, thereby freeing up its cash flows for dividends. But we think that its lack of commitment to a 50 sen DPS will dampen investor confidence in the stock. — CIMB Research, Sept 1


This article appeared in The Edge Financial Daily on Sept 2.