Maxis Bhd
(Nov 14, RM6.92)
Maintain “fully valued” at a target price of RM5.80: Ex-accelerated depreciation, third quarter of financial year 2014 (3QFY14) core earnings of RM492 million were in line with expectations.

The prepaid segment is turning around while the postpaid segment continues to enjoy positive subscriber traction of 8 sen dividend per share declared (in line).

Maintain “fully valued” call as valuation is not cheap at 24 times FY15 price-earnings ratio.

After five consecutive quarters of decline, Maxis is finally seeing some turnaround in its prepaid subscriber growth (39,000 net additions) in 3QFY14.

Average revenue per user (ARPU) is also creeping up (an increase of 3% quarter-on-quarter [q-o-q]) as more prepaid users embraced mobile Internet or subscribed to data passes. This could be largely attributable to the improvement in its distribution network.

The new postpaid plan had yet to impose significant impact on the company’s revenue. The postpaid segment continues to gain good traction on subscribers’ growth, though ARPU has been impacted by the repricing of pay-per-use data.

On the other hand, wireless broadband subscription remained on a downtrend (a decrease of 7% q-o-q), given intense competition in this segment.

With the goods and services tax to be implemented in April 2015, replacing the current sales and services tax, this would be an opportune time for the telecommunications industry to pass on to prepaid subscribers the service tax, which is currently being absorbed.

Ceteris paribus, assuming the 6% service tax is fully passed on, we estimate this could raise Maxis’ FY15 to FY16 earnings by 6% to 8%.

The regulator has mentioned about reviewing and potentially refarming the 2G spectrum. If implemented, this will pose further risks to Maxis’ dividend payout, given that its gearing level is approaching its 2 times net debt or earnings before interest, taxes, depreciation and amortisation limit.

In other words, Maxis will need to cut its dividend in order to fund the spectrum fees or auction bid, if any. — Alliance DBS Research, Nov 14

This article first appeared in The Edge Financial Daily, on November 17, 2014.