This article first appeared in The Edge Financial Daily on June 21, 2018
Maxis Bhd
(June 20, RM5.57)
Maintain hold with a fair value (FV) of RM5.76: We maintain our “hold” recommendation on Maxis Bhd with an unchanged discounted cash flow (DCF)-derived FV of RM5.76 (based on a weighted average cost of capital discount rate of 7% and a terminal growth rate assumption of 2%), implying a financial year 2018 forecast (FY18F) enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) of 11 times, one standard deviation below its three-year average of 12 times.
An English daily reported yesterday that Ananda Krishnan, who owns a 62.4% stake in Maxis and a 40% stake in Astro Malaysia Holdings Bhd, is considering a corporate exercise between the two listed entities.
In our view, a merger would be a rational option given that both Maxis and Astro are facing intense competition on multiple fronts.
Recall that Maxis expects continued contraction in post-paid average revenue per user (Arpu), exacerbated by the recent Hotlink Postpaid Flex, which offers free unlimited calls/SMS with 1GB of data at RM30/month and an option to purchase an additional 5GB of data for RM25/month.
In the first quarter ended March 31, 2018 (1QFY18), post-paid Arpu fell by RM4/month to RM92/month on lower packages for shared family lines. Continued attrition from legacy subscribers and migration from prepaid contributed to Maxis One customers, rising by 71,000 quarter-on-quarter to 2.1 million, while its active post-paid base fell by 59,000 to 2.9 million.
Management plans to arrest the declining prepaid base and improve its blended Arpu of RM51/month with the new Hotlink plans. However, we see a likelihood of an acceleration of prepaid migration to the new more affordable flexi plans due to their similar price points with the group’s prepaid Arpu of RM35/month currently.
While Maxis currently endures increasingly competitive plans from rivals, over-the-top players like iflix and Netflix and other pay-TV options such as unifi’s HyppTV drive down Astro’s Arpu and erode its subscription base, and consequently advertising revenues.
A merger will lead to an entity with a market capitalisation of RM53 billion (versus Maxis’ RM44 billion) with a combined net profit of RM2.6 billion. Given Astro’s lower valuations, the merged entity’s FY18F EV/Ebitda could slightly drop to 10.3 times with FY19F price-earnings sliding to 20.8 times. However, Astro’s higher FY18F net debt/Ebitda of 1.7 times will cause the merged entity’s to rise slightly from 1.3 times to 1.4 times.
We expect merger synergies from the convergence of Maxis’ and Astro’s services. For example, Maxis mobile and Home Fibre plans could be repackaged with Astro IPTV offerings, which could also be streamed to mobile devices.
Even though this should be value-enhancing, we highlight that such a move is merely a rearguard manoeuvre to prevent revenue erosion from declining Arpus and subscriber attrition. As such, we maintain Maxis’ forecasts pending further official announcements.
The stock’s FY18F EV/Ebitda of 11 times is almost at parity to its three-year average, while dividend yields are decent at 3%. — AmInvestment Bank, June 20