26 April 2012

Maxis's aggression in defending its market share could be offset by thinner margin resulting from the exceptional low rates offered, target price RM 5.69, (Hold) - ECM Libra Research

 (MAXIS opening stock price today (26.4.2012) was RM 6.09)

 We are mildly positive on Maxis' stepped-up aggression in defending its receding market share particularly in the prepaid segment as we believe that the incremental growth could be offset by thinner margin resulting from the exceptional low rates offered.

Maxis recently launched a new prepaid plan package, Hotlink Bagus that offers five services, namely voice, short message services, Internet, international direct dialling (IDD) and roaming, all under one plan that features lower call rates.

Noteworthy, local call rates are reduced further by around 17% if the subscribers maintain a minimum RM10 of credit balance.

Hotlink Bagus also offers an extra 40% discount on calls through the Bagus 5 Pass.

We view that Hotlink Bagus is a strategy to defend its prepaid market share.

We understand that upon the successful subscription of the Bagus 5 plan, the free 10MB data must be redeemed within 24 hours and is only valid for three days upon redemption.

Besides, subscribers would also enjoy the 40% cheaper call rates for both on-network and off-network.

In our view, Hotlink Bagus' cheaper rates seem to compete with market rates, while the bonuses offered under the Bagus 5 Pass are part of Maxis' strategy to win back its market share in the prepaid segment.

As the number of foreign workers in the country is growing due to increased construction activities following the roll-out of mega projects, we believe that Maxis is acting at the right time in expanding its market share in voice revenue among the foreign workers.

Currently, it only commands a weak presence of less than 20% share in the foreign workers segment.

With the lowest IDD call rate compared to its peers, we believe Maxis may win back a significant market share given the high price sensitivity among the foreign workers.

All in all, we believe that Maxis' aggressiveness in defending its eroding market share, particularly in the prepaid market could drive incremental growth but could put further stress on its margins due to intense competition.

On its dividend payout, we believe the RM1bil cash balance from the RM2.45bil sukuk musharakah (where RM1.45bil used for refinancing of existing loans) paves the way for Maxis to maintain its dividend per share of 40 sen in financial year 2012 ending Dec 31, of which, based on our estimates, represents a more than 100% payout.

Going forward, should Maxis decide to maintain its dividend payout, it may need to gear up more given that our financial years 2014 and 2015 assumption on free cashflows of RM2.5bil and RM2.6bil (after interest payments) may not be sufficient to fund its annual dividend payment of a total RM3bil.

We believe Maxis could maintain its dividend per share (DPS) of 40 sen, representing more than 100% of dividend payout ratio (DPR), assuming that Maxis borrows RM1bil in FY14 and FY15.

We have revised our valuation from the discounted cash flow (DCF) method to dividend discount model (DDM) with a revised target price of RM5.69.

Maxis remains a hold given its limited expected total return.

Source: www.thestar.com.my


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