This article first appeared in The Edge Financial Daily on April 1, 2020

Maxis Bhd
(March 31, RM5.35)
Maintain reduce with an unchanged target price (TP) of RM5.10: We hosted Maxis Bhd’s chief financial officer Wayne Treeby and head of investor relations Paul Zaman for a conference call with investors last Friday. Overall, there were no major surprises and the business has been fairly resilient despite Covid-19.

Our “reduce” rating is maintained with an unchanged discounted cash flow-based TP of RM5.10. For Maxis, our forecast financial year ending Dec 31, 2020 (FY20F) enterprise value or operating free cash flow of 21.1 times is at +1 standard deviation above its 10-year mean — its low was 12.2 times at end-2010 — but backed by FY20 to FY22 dividend yields of 3.7% to 4.1% per annum.

A lacklustre FY20F earnings growth is a key derating catalyst. Upside risks are a greater-than-expected fixed enterprise revenue growth or cost cuts.

Maxis’ international roaming revenue has fallen due to travel restrictions, but the impact is small, only 2% to 3% of FY19 service revenue. Its prepaid subscriptions are reloading in larger denominations but less often and many of which are now done online.

The company’s network traffic has risen 60% to 70% versus that before the movement control order (MCO) period. However, we reckoned extra revenue from this is unlikely due to the generous data quota in its post-paid plans and free one gigabyte per day from 8am to 6pm, offered from April 1 to the end of the MCO.

Maxis has upgraded its network capacity by rerouting traffic and leasing more submarine cables to support higher usage, and plans to bring forward some network equipment orders instead of the usual backloading seen in the fourth quarter.

Maxis said mobile competition has not intensified markedly despite some good offers from its peers recently. Besides ensuring its offers are attractive, Maxis touted its personalised offers to subscribers based on analytics and fixed-mobile bundles as key differentiators.

On fixed broadband, Maxis expects a continued subscription growth momentum, saying the take-up of higher speed plans, more profitable, has pleasantly been surprising. For the enterprise business, Maxis said most of its peers are still focused on mobile, while segment incumbents have not aggressively climbed up the value chain.

To-date, Maxis has implemented about 50% of its RM350 million cost optimisation for FY20 to buffer against cost increases, and begun planning a RM500 million savings programme for FY21.

After hiring 350 enterprise staff to-date, Maxis said there would only be minor staff additions in FY20. It may also explore initiatives to crystalise the value of its 8,000 to 9,000 towers and 16,000km of fibre, though nothing is concrete for now. It does not need to raise funds to pare debts as well.

We estimate Maxis’ towers to be worth RM1.7 billion to RM2.6 billion assuming a 1.8 times tenancy ratio and a 50% earnings before interest, taxes, depreciation and amortisation margin. — CGS-CIMB Research, March 30