Maxis faces voice headwinds

Maxis Bhd
(Oct 4, RM5.28)
Maintain neutral at RM5.29 with revised target price of RM5.70 (from RM5.90): Our recent visit did not alter our view that Maxis’s voice revenues will remain under pressure. While prepaid voice revenue may improve as tariffs have stabilised, postpaid revenue continues to be under pressure as users switch to DiGi.Com Bhd.

We maintain our “neutral” call but lower our target price as revenue headwinds suggest no re-rating, but downside risks are capped by its attractive dividend yield. With a dividend per share of 40 sen, Maxis is one of the few telcos in the region with an absolute dividend commitment.

Maxis said voice revenue is declining faster than expected because of the decline in postpaid users and price war in prepaid. We believe that the sharp discounts for pre-selected prepaid numbers have been detrimental not only to Maxis but the industry as well. There are early signs that voice and SMS are being substituted by data messaging.

Maxis acknowledged that DiGi has done a good job in attracting low-end postpaid users, which has come at the expense of Maxis’ base. However, Maxis said that it was addressing this issue. We think that Maxis will find it a challenge wresting back these users given its premium positioning and DiGi’s established position in the lower-end market.

We gather from the industry that Maxis will launch its home broadband service towards end-October. It has teamed up with Astro associate and Australia-based Fetch TV to launch IPTV as part of its triple-play offering. It is also bundling multimedia and interactive services.

We are lowering our revenue and core net profit by 3% to 9% after: (i) slashing our net add projections for wireless broadband from 400,000 per year in FY11 to FY13 to 60,000 per year. This is on the back of a sharp slowdown in this segment, which we believe is due to subscribers switching to Telekom Malaysia Bhd’s fibre broadband and Maxis taking its foot off the pedal on customer acquisition to focus on the more profitable small screen data; (ii) cutting our assumption of fixed broadband customers from 40,000 to 5,000 in FY11, 110,000 to 80,000 in FY12 and 260,000 to 230,000 in FY13. This is to reflect the delayed rollout of its broadband service, which means that the early adopters would have been locked up by TM. We expect TM to have at least 180,000 fibre broadband customers by end-2011; (iii) reducing our FY12/FY13 capital expenditure assumptions from RM1.3 billion to RM1 billion on the back of the revised guidance provided during its 2Q11 results briefing. Maxis expects capex to be RM1 billion or below due to capex efficiencies.

On the back of our forecast downgrades and the roll forward of our valuation horizon from end-2011 to end-2012, we reduce our discounted cash flow-based target price from RM5.90 to RM5.70 (weighted average cost of capital 10.8%). Despite the revenue headwinds and our earnings cut, we maintain our “neutral” recommendation as the downside  should be limited by Maxis’ attractive dividend yields. — CIMB Research, Oct 4