Maxis Bhd
(March 9 , RM5.43)
Upgrade to buy at RM5.44, target price raised to RM6.20: Maxis surprised the market with a four-year record-high 556,000 net additions in 4Q09, although 2008 and 2009 were clearly years of significant investment and noticeable consolidation. Conversely, Celcom Axiata Bhd recorded a three-year low of 214,000 net additions in 4Q09.

Whilst it is too early to see a trend reversal, we believe Celcom’s market share gains since 1Q07 will soften now that it appears to have withdrawn into network expansion mode.

Meanwhile, Maxis and DiGi.Com Bhd are well-prepared to grow their subscriber bases this year after last year’s network expansion.

Media sources also allude to significantly increased advertising by Maxis from 4Q09, now that it is back on the bourse and in the public domain. We think it is no coincidence that Maxis’ subscriber numbers bounced back in 4Q09, and rivals will find it a challenge trying to steal  subscriber market share from Maxis in 2010 to 2012.

Blended average revenue per user (ARPU) fell 6.3% year-on-year (y-o-y) to RM55 in 4Q09, similar to 3Q09’s y-o-y ARPU decline but an improvement compared to the higher 7% and 10% declines in the second and first quarters of 2009, respectively.

In short, as the economy has steadied, so has Maxis’ ARPUs. Furthermore, given up to six months of rebates Maxis has offered to new subscribers on special occasions, a 6% to 10% decline in ARPUs would in fact be considered on the low side.

We suspect that the majority of the over 500,000 new subscribers in 4Q09 came on board in November or December 2009. As their rebates, if any, wind down we would expect incremental revenues to kick in from as early as 1Q10.

This was most telling for wireless broadband subscribers given its much smaller subscriber base. ARPUs fell 18.6% y-o-y and 15% quarter-on-quarter (q-o-q) to RM86, or by about two months of rebates over its whole subscriber base.

Recurring earnings before interest, taxes, depreciation, and amortisation (Ebitda) in 2009 was weighed down by about RM120 million in non-operational expenses related to Maxis’ initial public offering. Stripping that off 2010 to 2012’s projections, and taking into account the trend of one to three months of rebates worked  into new subscribers packages since mid-2009, we expect a respectable 5% to 6% a year Ebitda growth in 2010 and  2011.

Maxis had last month secured two term loan facilities of RM2.5 billion and US$750 million (about RM2.5 billion). This is within our expectations of up to RM5 billion initially as Maxis repays a similar amount of inter-company dues owed to its parent Maxis Communications Bhd. The increased interest expense from such commercial loans could soften net profit growth to just over 1% a year in 2010 and 2011 before seeing a rebound to 4% in 2012.

We have imputed an 85% payout ratio, implying net dividend yields of just under 5% a year which will also allow a gentle deleveraging as net gearing falls from a forecast 48% at end-2010 to a forecast 39% at end-2012. We do not discount, however, that dividends may surprise on the upside if Maxis pays out 100% of net profits, which would translate into net yields of close to 6% a year in 2011 and 2012.

Previously, we assumed a beta of 1.0 given that Maxis would be new to the bourse. We now update that to 0.8, following its now near four-month debut on Bursa. Further, based on its last done share price of RM5.42, we derive a lower weighted average cost of capital of 8.5% from 9.7% as its proportion of equity falls to 87% from  88%.

We expect a more competitive landscape in 2010, with the impending relaunch of U Mobile’s services in 2H10 as well as WiMAX operators entering the critical phase of building a sustainable customer base. Furthermore, we expect DiGi to return to more aggressive price promotions. Even so, we expect Maxis to at least meet our forecasts for 5% and 6% Ebitda growth in 2010 and 2011, respectively, and consolidate its position as the undisputed domestic market leader. — Maybank IB, March 9


This article appeared in The Edge Financial Daily, March 10, 2010.