2015E dividends could be the twist

26 March 2015
2015E dividends could be the twist
Company Update
After our meeting with management, we believe 2015 will be a year of
delivery for Maxis as it kicks off its transformational plans. If 4Q14
operating trends are an early indicator, we would expect Maxis to
gain lost ground in this competitive market, provided its performance
sustains. However, we believe that strong gains will face challenges
and, thus, expect any sharp earnings upgrade to be limited. Dividend
downside on the other hand remains a key concern, especially given
the consensus’s wide range. Maintain HOLD and TP of RM7.19.
On track for further operational improvement in 2015
We think that Maxis is on the right track to futher showing operational
improvement as customer experience and satisfaction is once again
prioritized. For 2015, Maxis is expected to register single-digit service
revenue growth, as it regains lost ground both in the postpaid and prepaid
segment. We nevertheless think that any sharp earning upgrades in the
near term would likely be challenging considering that the other incumbent
operators are pursuing similar strategies to grow revenue share.
Lower dividends in store for 2015
Operations aside, we believe the biggest concern surrounding Maxis at
this point is the dividend quantum for 2015. Management has guided that
they will no longer borrrow to fund the dividend payment and thus the
consistent 40 sen/share annual payout over 2010-2014 is unlikely to be
repeated. This has created some uncertainty and judging by consensus
2015E DPS expectations of 19-40 sen, there may be some disappointment
in store. We lower our 2015-17E DPS forecast to 26-28 sen from 32 sen,
taking into account its FCF and payout ratio. At a DPS of 26 sen, yields of
4% are also less compelling and at the lower end of the sector average.
Maintaining HOLD and target price of RM7.19
On the whole, the market seems to be paying little attention to Maxis’
dividend issue, considering Maxis’ share-price appreciation of 4.4% ytd.
Fund flows and portfolio reallocation could be a reason behind this and
may continue to be an overbearing factor. We maintain our HOLD rating
and our 10-year DCF-derived 12-month target price of RM7.19. At this
point, any disappointment in dividends during the 1Q15 results
announcement could trigger a de-rating on the stock price while positive
earnings upgrades would be a pleasant surprise.
Earnings & Valuation Summary
FYE 31 Dec
2013
Revenue (RMm)
9,084.0
EBITDA (RMm)
4,573.0
Pretax profit (RMm)
2,496.0
Net profit (RMm)
1,765.0
EPS (sen)
23.5
PER (x)
30.4
Core net profit (RMm)
2,097.0
Core EPS (sen)
27.9
Core EPS growth (%)
2.3
Core PER (x)
25.6
Net DPS (sen)
40.0
Dividend Yield (%)
5.6
EV/EBITDA (x)
13.4
2014
8,389.0
4,296.0
2,436.0
1,721.0
22.9
31.2
1,910.0
25.4
(8.9)
28.1
40.0
5.6
14.6
Chg in EPS (%)
Affin/Consensus (x)
2015E
8,607.9
4,312.5
2,665.5
1,968.4
26.2
27.3
1,968.4
26.2
3.1
27.3
26.0
3.6
14.5
2016E
8,724.9
4,353.7
2,760.1
2,038.5
27.2
26.3
2,038.5
27.2
3.6
26.3
27.0
3.8
14.4
2017E
8,831.0
4,415.5
2,934.3
2,167.4
28.9
24.8
2,167.4
28.9
6.3
24.8
28.0
3.9
14.2
1.0
1.0
1.0
Maxis
MAXIS MK
Sector: Telecommunications
RM7.15 @ 25 Mar 2015
HOLD (maintain)
Upside 0.6%
Price Target: RM7.19
Previous Target: RM7.19
Price Performance
Absolute
Rel to KLCI
1M
+2.1%
+2.0%
3M
+5.1%
+0.6%
12M
+9.9%
+3.8%
Stock Data
Issued shares (m)
7,507.3
Mkt cap (RMm)/(US$m)
53,677.3/14,643.9
Avg daily vol - 6mth (m)
3.9
52-wk range (RM)
6.21-7.30
Est free float
18%
BV per share (RM)
0.63
P/BV (x)
11.34
Net cash/ (debt) (RMm) (4Q14)
(7,467)
ROE (2015E)
41.5%
Derivatives
Nil
Shariah Compliant
Yes
Key Shareholders
MCB
PNB
EPF
70.0%
8.3%
6.2%
Source: Affin Hwang, Bloomberg
Kevin Low
(603) 2143 2235
kevin.low@affinhwang.com
Source: Company, Affin Hwang estimates, Bloomberg
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 1 of 6
6 February 2015
We recently met up with management to discuss several pertinent issues
surrounding Maxis, including dividends (given the sharp deviation on
consesus forecast for 2015E), growth prospects and traction from its
transformational changes and competition, especially from new players.
The highlights are discussed in the sections below.
Dividends
Lower dividend in store for 2015…
Since Maxis’ relisting in 2009, the company has paid out an annual DPS of
40 sen per share. This included a quarterly interim DPS of 8 sen coupled
with a final DPS of 8 sen. The dividend payout however exceeded the
company’s earnings, which resulted in the company having to borrow to
fund its dividend payment. As at end-2014, the net-debt-to-EBITDA ratio
stood at 1.75x, up from 1.0x in 2009, although still comfortably within
management’s internal range of up to 2x.
…and yet our dividend forecast could be at risk
Management has however been guiding the market that from 2015, the
company will no longer borrow to fund its dividend payout. At our recent
meeting, management further clarified that the dividend payment would be
based on free cash flows after payment of interest and tax charges. Based
on our estimates, this would work out to an annual dividend of 26 sen per
share or 6.5 sen per quarter, which is below our previous estimate of 8 sen
per quarter. Note that this also falls to the lower end of street estimates of
19-40 sen for 2015. With this, we lower our 2015-17E DPS forecast to 2629 sen (from an annual payout of 32 sen previously), assuming a lower
payout ratio of between 97-99%.
Dividends yields are a lot less compelling at 4%
At 26 sen, dividend yields would also be a lot less compelling, and putting
Maxis at the lower end of the sector dividend-yield average. This thus
remains our key concern for Maxis, ie, that dividends could disappoint,
despite its improving operational performance.
Revenue growth
Targets single-digit service revenue growth in 2015
Growth has been an important agenda for Maxis after having seen a sharp
contraction in both revenue and earnings in 2014. This was, however,
partially attributed to its transformational strategy involving new products,
which ultimately led to an immediate elimination of non-sustainable future
revenues, eg, high roaming charges and exhorbitant data charges.
MaxisOne take up still limited…
We believe that Maxis is on the right track as customer experience and
satisfaction is once again prioritized with a goal of eliminating “bill shock”.
Importantly, this could possibly address the issue of its declining postpaid
ARPUs and likewise grow its prepaid segment (Fig 1 and 2). While take up
of its postpaid MaxisOne plan is still relatively small at 250k subs (as at
end 2014 or accounting for <8% of its postpaid sub base), this product has
had a positive impact of lifting ARPU as most of these subs are on the
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 2 of 6
6 February 2015
RM128 price plans (vs the RM78 lite version), and paying for additional
data on top of that.
Fig 1: Declining postpaid ARPU
Fig 2: Declining prepaid subs
Source: Maxis, AffinHwang
Source: Maxis, AffinHwang
Fig 3: MaxisOne plan for postpaid subscribers
Source: Maxis
… but could provide upside to ARPU
A successful migration of Maxis’ existing postpaid customers to this new
plan could lift ARPU and hence earnings, although the small take up so far
suggests some stickiness towards existing plans or its subscribers’
unwillingness to commit to a higher monthly plan. Nevertheless, based on
our estimates, every RM1 increase in postpaid ARPU could lead to an
EPS enhancement of +0.3% and a RM0.04 increase to our 10-year DCFderived target price.
Prepaid segment showing improvement
Likewise, Maxis’s prepaid product has also been revamped, and now
comes inclusive of free basic internet in addition to free social media
access (over-the-top chat applications and Facebook) at 64kbps. We
believe that this product is potentially gaining traction in the youth segment
given the lure of free social media access, which also explains the sharp
rise in Maxis’ prepaid sub base in the recent quarter (543k in 4Q14 vs 39k
in 3Q14).
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 3 of 6
6 February 2015
Competition
Competition remains rational
We concur with management that competition in the market place will
likely remain rational despite growing threats from the smaller newcomers,
which include U Mobile and upcoming wireless service provider, P1.
Impact from new competition likely to be muted
While the market anticipates the launch of P1’s service, we believe that its
impact will be rather muted considering the lack of network infrastructure
to have extensive nationwide coverage and, hence, to have a meaningful
rollout (note that P1 has LTE spectrum on the 2.3GHz and 2.6GHz bands
and TM has the low-band spectrum of 450MHz and 850MHz). While a
domestic roaming agreement may materialize, lessons learnt from the
Maxis-U Mobile collaboration may deter any incumbent operator from
being too aggressive in such arrangements.
Valuation and recommendation
Maintain HOLD and target price of RM7.19
On the whole, while there are valid concerns over Maxis, we believe that
the market seems to be paying little attention to this, judging by Maxis’
share price appreciation of 4.4% ytd. We maintain our HOLD rating and
our 10-year DCF-derived 12-month target price of RM7.19. At this point,
any disappointment in dividends during the 1Q15 results announcement
could trigger a de-rating on the stock but earnings upgrades from its
transformational changes would be a pleasant surprise. We nevertheless
believe that any sharp upgrades in the near term would likely be
challenging considering that the other incumbent operators are pursuing
similar strategies to grow revenue share.
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 4 of 6
6 February 2015
MAXIS – FINANCIAL SUMMARY
Profit & Loss Statement
Key Financial Ratios and Margins
FYE Dec (RMm)
Total revenue
Operating expenses
EBITDA
Depreciation
Amortisation
EBIT
Net interest income/(expense)
Associates' contribution
Others
Pretax profit
Tax
Minority interest
Net profit
2013
9,084
(4,511)
4,573
(1,101)
(265)
3,207
(329)
2,878
(724)
(7)
2,147
2014
8,389
(4,093)
4,296
(1,155)
(249)
2,892
(380)
2,512
(711)
(4)
1,797
2015E
8,608
(4,295)
4,313
(1,014)
(265)
3,034
(369)
2,665
(693)
(4)
1,968
2016E
8,725
(4,371)
4,354
(973)
(265)
3,116
(356)
2,760
(718)
(4)
2,039
2017E
8,831
(4,415)
4,415
(872)
(265)
3,278
(344)
2,934
(763)
(4)
2,167
FYE Dec (RMm)
Growth
Revenue (%)
EBITDA (%)
Core net profit (%)
Profitability
EBITDA margin (%)
PBT margin (%)
Net profit margin (%)
Effective tax rate (%)
ROA (%)
Core ROE (%)
ROCE (%)
Dividend payout ratio (%)
50.3
31.7
23.6
25.2
30.0
32.1
23.3
170.1
Balance Sheet Statement
FYE Dec (RMm)
Fixed assets
Other long term assets
Total non-current assets
Cash and equivalents
Stocks
Debtors
Other current assets
Total current assets
Creditors
Short term borrowings
Other current liabilities
Total current liabilities
Long term borrowings
Other long term liabilities
Total long term liabilities
2013
4,038
11,440
15,478
808
70
947
27
1,852
2,434
1,021
206
3,661
6,676
977
7,653
2014
4,008
11,523
15,531
1,531
12
971
64
2,578
3,002
949
232
4,183
8,118
1,070
9,188
2015E
3,794
11,258
15,052
2,186
59
825
64
3,134
3,060
949
232
4,241
8,118
1,070
9,188
2016E
3,622
10,993
14,615
2,681
60
837
64
3,642
3,114
949
232
4,295
8,118
1,070
9,188
2017E
3,549
10,728
14,277
3,109
60
847
64
4,081
3,145
949
232
4,326
8,118
1,070
9,188
Liquidity
Current ratio (x)
Op. cash flow (RMm)
Free cashflow (RMm)
FCF/share (sen)
6,016
4,738
4,758
4,774
4,844
2013
2,147
1,101
724
(731)
236
3,477
(540)
(261)
(801)
(168)
(3,002)
335
(2,835)
2014
1,797
1,155
595
560
4,107
(978)
(254)
(1,232)
1,476
(3,002)
(626)
(2,152)
2015E
1,968
1,014
156
695
3,834
(800)
(800)
(1,952)
(426)
(2,378)
2016E
2,039
973
42
695
3,748
(800)
(800)
(2,027)
(426)
(2,453)
2017E
2,167
872
21
695
3,756
(800)
(800)
(2,102)
(426)
(2,528)
2,937
3,129
3,034
2,948
2,956
Shareholders' Funds
Cash Flow Statement
FYE Dec (RMm)
Net Profit
Depreciation & amortisation
Working capital changes
Cash tax paid
Others
Cashflow from operations
Capex
Disposal/(purchases)
Others
Cash flow from investing
Debt raised/(repaid)
Equity raised/(repaid)
Net inct income/(expense)
Dividends paid
Others
Cash flow from financing
Free Cash Flow
Asset management
Debtors turnover (days)
Stock turnover (days)
Creditors turnover (days)
Capital structure
Net Gearing (%)
Interest Cover (x)
Quarterly Profit & Loss
FYE 31 Dec (RMm)
Revenue
Operating expenses
EBITDA
Depreciation
EBIT
Net int income/(expense)
Associates' contribution
Exceptional Items
Pretax profit
Tax
Minority interest
Net profit
Core net profit
Margins (%)
EBITDA
PBT
Net profit
2013
2014
2015E
2016E
2017E
1.3
4.4
2.3
(7.7)
(6.1)
(8.9)
2.6
0.4
3.1
1.4
1.0
3.6
1.2
1.4
6.3
51.2
29.9
21.4
28.3
26.1
35.5
21.0
174.5
50.1
31.0
22.9
26.0
28.4
41.5
22.0
99.1
49.9
31.6
23.4
26.0
28.1
42.8
22.5
99.4
50.0
33.2
24.5
26.0
28.4
45.1
23.6
97.0
0.5
3,477
2,937
39
0.6
4,107
3,129
42
0.7
3,834
3,034
40
0.8
3,748
2,948
39
0.9
3,756
2,956
39
38
6
195
42
1
264
35
5
260
35
5
260
35
5
260
113.9
12.8
159.1
10.1
144.6
10.1
133.8
10.2
123.0
10.4
4Q13
2,224
(1,121)
1,103
(353)
750
(87)
(235)
428
(136)
(2)
290
525
1Q14
2,119
(1,043)
1,076
(332)
744
(90)
1
3
657
(169)
(4)
484
481
2Q14
2,082
(1,010)
1,072
(349)
723
(91)
2
2
634
(183)
(5)
446
444
3Q14
2,065
(972)
1,093
(328)
765
(101)
3
(21)
643
(192)
(2)
449
470
4Q14
2,123
(1,068)
1,055
(395)
660
(98)
4
(60)
502
(167)
(4)
331
391
49.6
19.2
13.0
50.8
31.0
22.8
51.5
30.5
21.4
52.9
31.1
21.7
49.7
23.6
15.6
Source: Maxis, Affin Hwang forecasts
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 5 of 6
6 February 2015
Equity Rating Structure and Definitions
BUY
Total return is expected to exceed +10% over a 12-month period
HOLD
Total return is expected to be between -5% and +10% over a 12-month period
SELL
Total return is expected to be below -5% over a 12-month period
NOT RATED
Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a
recommendation
The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.
OVERWEIGHT
Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months
NEUTRAL
Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months
UNDERWEIGHT
Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months
This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank
Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does
not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or
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This report is printed and published by:
Affin Hwang Investment Bank Berhad (14389-U)
(formerly known as HwangDBS Investment Bank Berhad)
A Participating Organisation of Bursa Malaysia Securities Bhd
Chulan Tower Branch,
3rd Floor, Chulan Tower,
No 3, Jalan Conlay,
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www.affinhwang.com
Email : research@affinhwang.com
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Fax : + 603 2145 3005
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 6 of 6