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This article first appeared in The Edge Financial Daily on July 11, 2017

Maxis Bhd
(July 10, RM5.51)
Maintain hold with a lower target price of RM5.80:
At end-June, Maxis Bhd completed a private placement of 300 million new shares or 4% of its total issued shares to institutional investors. At RM5.52 per share, the gross proceeds of RM1.66 billion would be used for debt repayment. We estimate this will lower net debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) from two times as at the end of the first quarter of financial year 2017 (1QFY17) to 1.6 times and give Maxis sufficient headroom for potential spectrum payments and investments in adjacent businesses. FY17 to FY19 forecast core earnings per share (EPS) are diluted by between 0.9% and 1.4% due to an enlarged share base, partly offset by interest cost savings.

On June 28, Maxis announced that U Mobile Sdn Bhd had decided to terminate its network sharing and alliance (NSA) agreement. This pertained to the 3G radio access network (RAN) sharing that Maxis had provided to U Mobile outside of major city centres since the fourth quarter of 2012. The termination will take place in stages over a period of 18 months, to be completed on Dec 27, 2018. However, this does not include the 2G domestic roaming contract, which we believe U Mobile intends to extend for a further five years to 2022. We believe the termination is on the back of the expiry of the first phase (five-year) of the 10-year 3G RAN sharing deal. Hence, there are no early-cancellation penalties to be imposed on U Mobile. Maxis’ announcement said the NSA contributed less than 3% of its FY16 revenue. Assuming little costs, we estimate it may have formed 5% to 6%/9% to 10% of FY16 Ebitda/core EPS. We assume that the 3G RAN sharing revenue from U Mobile will gradually taper off from mid-FY17 to end-FY18 and be nil from FY19 onwards, and 2G roaming revenue will persist until 2022, but be on the decline due to U Mobile’s network coverage expansion and the structural transition from voice to data services. Coupled with the dilution from the enlarged share base, we have cut Maxis’ FY17F (forecast) to FY19F core EPS by 0.7% to 14.7% and FY18F to FY19F dividend per share by 4% to 8% to 23 sen to 24 sen.

We expect that service revenue likely inched up about 1% quarter-on-quarter (q-o-q) (up 4% year-on-year [y-o-y]) due to positive seasonality offset by still-intense market competition. The Ebitda margin likely eased by between 0.3% and 0.5% q-o-q (up between 3% and 4% y-o-y) to about 51% mainly due to a seasonal pickup in marketing cost, but partly offset by lower staff costs after a one-time adjustment in 1QFY17. We expect post-paid subscriptions to be held up after rising through the last three quarters, while prepaid  subscriptions likely eased further due to intense competition and industry-wide SIM card consolidation.

We expect Maxis’ near-term results to be on a par with/better than its smaller local peers due to intense prepaid competition. Its FY18F enterprise value/operating free cash flow of 13.4 times is trading at a 10% discount to the Asean average, with decent FY17F to FY19F dividend yields of 4% to 4.4%. Downside risk would be structural headwinds as the market approaches network parity. Upside risk would be better sales growth. — CIMB Research, July 7
 

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