Maxis (MAXIS MK) Sell (Maintained) Cost Discipline Cushions CTS Impact

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1 Results / Briefing Note, 13 November 2013 Maxis (MAXIS MK) Sell (Maintained) Communications - Telecommunications Target Price: MYR5.90 Market Cap: USD16,667m Price: MYR7.12 Cost Discipline Cushions CTS Impact Macro Risks Growth Value Maxis (MAXIS MK) Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS) Maxis 9MFY13 results suggest that it continued to manage costs well, which helped to minimise pressure on EBITDA margin due to a one-off career transition scheme (CTS) cost. With management s lower revenue growth guidance of 2-3%, we maintain our view that earnings growth will remain tepid in Without a strong earnings growth profile, we think the stock will likely underperform amid rising bond yields Within expectations. Maxis 9M13 core net profit of MYR1,627m (+3.9% y-o-y) was within our and consensus expectations, accounting for 78% and 76% of full-year estimates respectively. Vol m Nov-12 Jan-13 Source: Bloomberg Mar-13 Avg Turnover (MYR/USD) May-13 Jul-13 Sep m/12.5m Cons. Upside (%) -5.8 Upside (%) wk Price low/high (MYR) Free float (%) 22 Shareholders (%) Maxis Communications 65.0 Permodalan Nasional Berhad 7.3 Employees Provident Fund 6.0 Shariah compliant Lim Tee Yang CFA lim.tee.yang@rhbgroup.com Service revenue nudges down sequentially. Q-o-q, 3Q headline revenue was lower (-2.4%) mainly due to sharply lower device sales (- 52.4%) as management scaled back on outright device sales, which offer low margins. In addition, service revenue (ie excluding device sales that comprise 2.0% of headline revenue) eased 0.8% q-o-q as data growth (+3.1%) was insufficient to mitigate further SMS-to-data substitution despite voice being stable. The telco s 3Q core EBITDA margin (excluding a one-off career transition scheme (CTS) cost amounting to MYR102m) improved by 0.7 ppts q-o-q to 51.5%, mainly due to lower outright device sales. Together with a higher effective tax rate, core net profit declined 1.8% q-o-q. Briefing highlights. While unable to share in detail his future plans for Maxis, CEO Mr Morten Lundal hopes to revitalise the group s position in the prepaid segment and regain its market share. In addition, management intends to turn Maxis into a high-performance organisation. Besides, management lowered its 2013 revenue growth guidance to 2-3% (from the mid-single digits), which partly reflects its decision to scale down on outright device sales, which offer low margins. EBITDA margins remained very healthy (despite the one-off CTS cost) due to continued cost discipline but appear unlikely to improve further. Dividends. Maxis declared a third interim net DPS of 8.0 sen (translating into a 3Q EPS payout ratio of 127%). For FY13, we estimate DPS at 40 sen. Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover (MYRm) 8,869 8,800 8,967 9,279 9,470 Reported net profit (MYRm) 2,295 2,527 1,856 2,090 2,107 Recurring net profit (MYRm) 2,295 2,188 2,045 2,090 2,107 Recurring net profit growth (%) 2.8 (4.7) (6.5) Core EPS (MYR) DPS (MYR) Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) EV/EBITDA (x) Net debt to equity (%) Our vs consensus EPS (%) (2.9) (8.2) See important disclosures at the end of this report Powered by EFA TM Platform 1

2 13 November 2013 Briefing highlights Outlook. Maxis new CEO, Mr Morten Lundal, participated in the call for the first time since he joined the group in 1 Oct to discuss 3Q13 results. Mr Lundal was unable to share in detail his future plans for Maxis, which is understandable since it has been only a month since he joined the firm. In an overview, management said that revitalising Maxis position in the prepaid segment and regaining market share are among its priorities. In addition, management intends to turn Maxis into a high-performance organisation. This would depend on execution, which we believe may hopefully be achieved after the group reorganised its corporate structure and undertook a career transition scheme in mid Guidance. Management lowered its 2013 revenue growth guidance to 2-3% (previously mid-single digit), which partly reflects its decision to scale down on outright device sales, which have low margins. Device sales fell 25.2% y-o-y in 3Q, resulting in non-voice revenue growing just 1.0% y-o-y in 3Q significantly below our 7-8% y-o-y estimate to achieve its previous mid-single digit revenue growth guidance. There is no change to its EBITDA margin guidance, which management expects to remain stable (FY12: 48.6%). We see little downside to Maxis EBITDA margin, as it stood at 48.7% in 9M13, even after including the MYR102m career transition scheme cost. Cost management. Its 9M13 EBITDA margin stood at 48.7%, which was relatively strong. Lower marketing expenses have been a key factor for the healthy EBITDA margin. Maxis continued cost discipline has also helped keep the general and administrative costs/revenue ratio at the lower end of the 6-8% range over the last two quarters. We maintain our EBITDA margin forecast of 49.0%, as management believes marketing expenses could normalise to higher levels to stimulate revenue growth. Home segment. There was an uptick of just 7.0k net additions in 3Q13 (2Q: 5.3k) for Maxis home service (ie Maxis-Astro fibre with IPTV service), bringing total cumulative home service subscribers to 41k. This was in line with management s earlier indication that the fine-tuning work was largely done, and the company should, therefore, see better subscriber growth traction in 2H. U Mobile. For 3Q, Maxis booked revenue of MYR49m (1H: MYR86m) from radio access network (RAN) sharing and nationwide 2G roaming fees from U Mobile. Therefore, management will likely exceed its initial FY13 guidance of MYR130m- 150m, although this would not lead to any material changes to our earnings forecasts. Risks The risks include: i) stronger-than-expected net adds, ii) better-than-expected execution, eg network upgrades and expansion, and iii) less intense competition. Forecasts We maintain our forecasts. Valuation and recommendation We maintain our SELL recommendation on Maxis, with our DCF-derived FV unchanged at MYR5.90 (WACC: 8.6%, terminal growth rate: 1.5%). Given the lack of earnings growth, Maxis appeal has always been its relatively generous dividend yields. However, without a strong earnings growth profile, we think the stock will likely underperform amid rising bond yields. See important disclosures at the end of this report 2

3 Figure 1: Results review FYE Dec (MYR m) 3QFY12 2QFY13 3QFY13 q-o-q (%) y-o-y (%) 9MFY12 9MFY13 y-o-y (%) Comments Revenue 2, , ,239.0 (2.4) 1.0 6, , Lower q-o-q mainly from lower handset sales (- 52.4%). SMS (-7.3%) and wireless broadband (- 14.2%) remained weak. EBITDA 1, , ,052.0 (9.7) (0.3) 3, , Lower q-o-q due to one-off career transition scheme cost of MYR102m. EBITDA Margin (%) Depreciation (347.0) (349.0) (303.0) (13.2) (12.7) (1,054.0) (1,029.0) (2.4) Lower q-o-q due to the absence of accelerated depreciation. EBIT (8.2) 5.8 2, , EBIT Margin (%) Interest expense (90.0) (88.0) (89.0) 1.1 (1.1) (251.0) (265.0) 5.6 Total borrowings stood at MYR6.97bn as at 3QFY13 (2QFY13: MYR6.91bn; 3QFY12: MYR6.74bn). Interest income (50.0) (42.5) Pretax profit (9.3) 5.5 2, , Pretax Margin (%) Tax (189.0) (205.0) (193.0) (5.9) 2.1 (547.0) (588.0) 7.5 Effective tax rate (%) Minority interests (1.0) (2.0) (2.0) (4.0) (4.0) 0.0 Net Profit (10.6) 6.8 1, ,476.0 (0.1) Core Profit (0.2) , , Adjusted mainly for accelerated depreciation. Also adjusted for MYR102m career transition scheme cost booked in 3Q13. Net Margin (%) Figure 2: Key statistics FYE Dec (MYR m) 3QFY12 2QFY13 3QFY13 q-o-q (%) y-o-y (%) Comments Subscribers (m) - Prepaid 9,610 10,497 9,845 (6.2) Postpaid 2,559 2,713 2, Broadband (4.1) Total 12,800 13,873 13,213 (4.8) 3.2 Net adds (m) - Prepaid (652) - Postpaid Broadband (27) - Total (633) High churn mainly from non-active non-revenue generating customers. ARPU (MYR) - Prepaid (10.8) - Postpaid (2.9) (5.7) - Blended (7.7) Lower q-o-q due to continued voice-to-data substitution. AMPU (min) - Prepaid (2.5) (12.8) - Postpaid (2.9) (8.3) - Blended (1.9) (11.6) See important disclosures at the end of this report 3

4 Financial Exhibits Profit & Loss (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover 8,869 8,800 8,967 9,279 9,470 Cost of sales (2,957) (2,763) (3,006) (3,089) (3,264) Gross profit 5,912 6,037 5,961 6,190 6,206 Other operating costs (2,610) (2,819) (3,133) (3,118) (3,112) Operating profit 3,302 3,218 2,828 3,072 3,094 Operating EBITDA 4,353 4,366 4,190 4,496 4,601 Depreciation of fixed assets (976) (1,011) (1,182) (1,152) (1,216) Amortisation of intangible assets (75) (137) (180) (272) (291) Operating EBIT 3,302 3,218 2,828 3,072 3,094 Other recurring income Interest income Interest expense (240) (268) (339) (339) (339) Pre-tax profit 3,132 3,004 2,576 2,830 2,852 Taxation (837) (473) (716) (736) (742) Minority interests - (4) (4) (4) (4) Profit after tax & minorities 2,295 2,527 1,856 2,090 2,107 Reported net profit 2,295 2,527 1,856 2,090 2,107 Recurring net profit 2,295 2,188 2,045 2,090 2,107 Cash flow (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Operating profit 3,302 3,218 2,828 3,072 3,094 Depreciation & amortisation 1,051 1,148 1,362 1,424 1,507 Change in working capital 335 (87) (262) Other operating cash flow (4) (3) Operating cash flow 4,768 4,287 4,100 4,588 4,634 Interest received Interest paid (240) (268) (339) (339) (339) Tax paid (721) (636) (690) (736) (742) Cash flow from operations 3,836 3,423 3,122 3,563 3,603 Capex (1,381) (1,166) (990) (1,200) (1,250) Other investing cash flow (74) Cash flow from investing activities (1,455) (1,166) (990) (1,150) (1,200) Dividends paid (2,925) (3,000) (3,000) (3,000) (3,000) Increase in debt ,000-1,000 Other financing cash flow (73) (16) (3) - - Cash flow from financing activities (2,675) (2,317) (2,003) (3,000) (2,000) Cash at beginning of period 1, Total cash generated (294) (60) 129 (587) 403 Implied cash at end of period See important disclosures at the end of this report 4

5 Financial Exhibits Balance Sheet (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total cash and equivalents Inventories Accounts receivable ,011 Total current assets 2,103 1,836 2,042 1,493 1,919 Total investments Tangible fixed assets 5,007 4,971 4,459 4,507 4,541 Intangible assets 11,019 11,060 11,152 10,880 10,589 Total other assets Total non-current assets 16,122 16,155 15,760 15,536 15,279 Total assets 18,225 17,991 17,802 17,029 17,198 Short-term debt 13 1, Accounts payable 3,150 2,851 2,659 2,752 2,808 Other current liabilities Total current liabilities 3,323 4,386 2,768 2,901 2,960 Total long-term debt 5,094 4,445 6,810 6,810 7,810 Other liabilities 1,142 1,072 1,167 1,167 1,167 Total non-current liabilities 6,236 5,517 7,977 7,977 8,977 Total liabilities 9,559 9,903 10,745 10,878 11,937 Share capital Retained earnings reserve 7,916 7,334 6,299 5,389 4,496 Shareholders' equity 8,666 8,084 7,049 6,139 5,246 Minority interests Total equity 8,666 8,088 7,057 6,151 5,262 Total liabilities & equity 18,225 17,991 17,802 17,029 17,198 Key Ratios (MYR) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Revenue growth (%) 3.0 (0.8) Operating profit growth (%) 8.3 (2.5) (12.1) Net profit growth (%) (26.6) EPS growth (%) (26.6) Bv per share growth (%) (3.1) (6.7) (12.8) (12.9) (14.6) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) DPS Recurrent cash flow per share See important disclosures at the end of this report 5

6 SWOT Analysis Maxis together with Astro launched Astro B.yond IPTV (internet protocol television) on 30 April 2013 Dominant player in the mobile market Strength in postpaid and youth segments Competitors chipping away market share Irrational price competition Growth in fibre market with Astro partnership Low smartphone penetration offers an opportunity to upsell higherpriced postpaid plans bundled with data Appears not nimble enough when competing against its smaller peers Faces margin pressure due to handset subsidies and fibre gestation costs P/E (x) vs EPS growth P/BV (x) vs ROAE 35 20% % 30 6% % % -23% -37% -51% % 25% 17% 5-66% 2.0 8% 0-80% 0.0 0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Maxis is the largest mobile operator in Malaysia and the country s only integrated communications service provider. See important disclosures at the end of this report 6

7 Recommendation Chart Price Close 7.5 Recommendations & Target Price 7.0 NR Buy Neutral Sell Trading Take Profit 5.0 Buy Nov-09 Nov-10 Dec-11 Dec-12 Not Rated Source: RHB estimates, Bloomberg Date Recommendation Target Price Price Sell Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Source: RHB estimates, Bloomberg See important disclosures at the end of this report 7

8 RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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