PP 7767/09/2010(025354)

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R esults/Briefing No te
1 September 2010
MARKET DATELINE

Maxis Share Price

Fair Value
:
:
RM5.38
RM5.75
2QFY10 Net Profit Declines 3.6% QoQ On Higher Recom : Outperform
(Maintained)
Operating Expenses

Table 1 : Investment Statistics (MAXIS; Code: 6012) Bloomberg: MAXIS MK

Net Core Net
FYE Turnover profit EPS EPS Growth PER C.EPS* P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 8,611.0 2,232.0 29.8 31.1 (2.7) 17.3 - NA 0.4 26.9 2.8
2010f 9,396.2 2,348.4 31.3 31.3 0.6 17.2 32.8 NA 0.4 25.5 6.5
2011f 10,171.7 2,549.2 34.0 34.0 8.5 15.8 32.8 NA 0.4 27.2 7.1
2012f 10,788.3 2,754.0 36.7 36.7 8.0 14.7 34.2 NA 0.4 30.0 7.6
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Below expectations. 1HFY10 net profit of RM1,084m (-5% yoy) came in

RHBRI Vs. Consensus
below expectations, at only 43.6% of our and 44.0% of the consensus full-
Above
year estimates. Key variances against our forecasts were: 1) lower-than-
In Line
expected revenue; and 2) higher-than-expected administrative and
Below
network operation expenses.
♦ EBITDA margin declined qoq on higher expenses. QoQ, revenue rose Issued Capital (m shares) 7,500.0
by 1.8% to RM2,191m largely due to: 1) a 6.1% increase in non-voice Market Cap (RMm) 40,350.0
revenue aided by an increase of 32.2% in broadband revenue; and 2) Daily Trading Vol (m shs) 4.1
higher contribution from the hubbing business. Stripping off a RM20m one- 52wk Price Range (RM) 5.00 – 5.54
off rebate on GPRS, we note that 2QFY10 revenue would have increased Major Shareholders: (%)
by 2.7% qoq. However, both EBITDA and EBITDA margin declined by 5.0% Maxis Communications 70.0
and 3.4%-pts to RM1,028m and 46.9% respectively, mainly due to: 1)
higher marketing expenses (2Q: 5.2% of total revenue vs 1Q: 2.9%, as
Maxis incurred RM45m marketing and sales and promotion expenses for
the FIFA World Cup sponsorship in 2Q); 2) higher general and FYE Dec FY10 FY11 FY12
administrative expenses (2Q: 7.2% of total revenue vs. 1Q: 6.6%); and 3) EPS chg (%) (5.6) (6.1) (6.3)
higher interconnect costs on higher hubbing traffic, which were partly Var to Cons (%) (4.7) (0.5) 2.1
mitigated by cost savings from cost-management initiatives.
Share Price Chart
♦ ARPU remained healthy in 2Q. Total postpaid subscribers declined by
0.9% qoq to 2.7m but prepaid and broadband subscribers rose 1.7% and
43.1% to 9.8m and 448k respectively on the back of: 1) continued efforts
in penetrating the underserved areas (in particular, East Coast and East
Malaysia); and 2) broadband promotional package that appeared to have
been well received. Prepaid ARPU declined by 2.7% qoq to RM36 mainly
due to a 3.5% qoq decline in RPM that more than offset a 0.8% qoq
increase in MOU, while postpaid ARPU increased by 1.0% qoq to RM103,
mainly due a 0.8% increase in MOU. Broadband ARPU, on the other hand,
remained flat at RM69 and this was mainly sustained by the promotional
Relative Performance To FBM KLCI
packages.
♦ 2nd interim DPS of 8 sen. Maxis declared a second interim single-tier
DPS of 8 sen, which translates to a net yield of 1.5% and a payout ratio of FBM KLCI
112.7% based on 2Q profit. The entitlement for the 2nd interim dividend is
17 Sep ’10 while payment date is 30 Sep ’10.
♦ Risks. The risks include: 1) weaker-than-expected net adds; 2) execution Maxis
(e.g. network upgrades and expansion); and 3) all-out price war.
♦ Forecasts. We are revising our FY10-12 net profit forecasts downwards by
5.6-6.3% to RM2,348.4m, RM2,549.2m, and RM2,754.0m respectively to
account for: 1) lower ARPU assumptions; and 2) higher administrative Chye Wen Fei
expenses. (603) 9280 2172
♦ Investment case. DCF-derived fair value has been lowered by 7.3% from chye.wen.fei@rhb.com.my
RM6.20 to RM5.75 (WACC=8.4%, TG=1.5%). Maintain Outperform.
David Chong, CFA
Please read important disclosures at the end of this report. (603) 9280 2186
david.chong@rhb.com.my

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 1 September 2010

Briefing Highlights

♦ Regulatory changes. Management expects the new interconnect termination rates (which took place effective 15
Jul ’10) could hamper Maxis’ EBITDA by RM20-40m in FY10 (depending on traffic patterns), while the downward
revision in Singapore roaming charges could hamper Maxis’ revenue by RM30m per annum. As for spectrum re-
farming, Maxis expects the auction to be limited to existing players and to reach first landing by 1Q 2011.

♦ Revenue growth projection for FY10 lowered. Management toned down their revenue guidance for FY10 from
high single-digit to 5-6%, mainly due to the recent regulatory changes, which include: 1) the downward revision in
interconnection termination rates that came earlier than expected; and 2) the proposed drop in Malaysia-Singapore
roaming charges, which would have a negative impact on its FY10 revenue growth. Nevertheless, management
remains upbeat on revenue growth over the longer term, supported by: 1) its initiatives to boost subscriber base at
the prepaid segment; and 2) stronger contribution from non-voice revenue (both broadband and advanced data
services). In terms of profitability, management remains confident that that EBITDA margins would be maintained
above the 50% mark and this is mainly on the back of ongoing cost-control measures and strong data revenue
growth ahead. In addition, management does not expect voice tariff to heighten in the near term, as: 1) existing
players are focusing on cleaning up their subscriber base (on the back of aggressive subscriber acquisition in the
past); and 2) lower tariff may not necessarily result in subscriber growth.

♦ Capex. Despite YTD capex incurred (RM442m) accounting for only 31.6% of total capex guidance of RM1.4bn
(RM1.2bn for mobile business and RM0.1bn for home business) for FY10, management is keeping to its capex
guidance, as capex is expected to accelerate in 2H arising from: 1) laying of 500km fibre that encompasses 300
sites; 2) deployment of more than 800 new 3G/wireless broadband sites rollout to support its broadband and
mobile ambitions; and 3) expansion of coverage in East Malaysia and East Coast.

Risks

♦ Risks to our view. The risks include: 1) weaker-than-expected net adds; 2) execution (e.g. network upgrades and
expansion); and 3) all-out price war.

Forecasts

♦ Earnings forecasts. We are revising our FY10-12 net profit forecasts downward by 5.6-6.3% to RM2,348.4m,
RM2,549.2m, and RM2,754.0m respectively to account for: 1) lower ARPU assumption; and 2) higher
administrative expenses.

Valuations And Recommendation

♦ Outperform call reiterated. Following the downward revision in our earnings forecasts, our DCF-derived fair value
has been lowered by 7.3% from RM6.20 to RM5.75 (WACC=8.4%, TG=1.5%). Maintain Outperform
recommendation on the stock.

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Table 2: Results Review

FYE Dec (RMm) 2Q09 1Q10 2Q10 QoQ YoY 1H09 1H10 YoY Comments
(%) (%) (%)
Revenue 2,116 2,152 2,191 1.8 3.5 4,244 4,343 2.3 Excluding a one-off rebate on GPRS of
RM20m, 1HFY10 revenue increased by
2.8% to RM4,363m.

Higher yoy on: 1) higher subscriber base;

and 2) a 19.2% increase in non-voice
revenue contribution on increased usage of
internet and wireless broadband services.

EBITDA 1,133 1,082 1,028 (5.0) (9.3) 2,146 2,110 (1.7) Lower yoy on: 1) higher sales and
marketing expenses incurred on 2010 FIFA
World Cup sponsorship; and 2) increased
handset subsidies, in tandem with higher
device revenue, partly mitigated by lower
allowance for doubtful debts and cost
savings from cost-management initiatives.
Dep/Amort (345) (267) (250) (6.4) (27.5) (612) (520) (15.0)
EBIT 788 815 778 (4.5) (1.3) 1,534 1,590 3.7
Int inc 10 5 7 40.0 (30.0) 20 12 (40.0)
Int exp (11) (55) (65) 18.2 >100 (22) (117) >100
Assoc 0 0 0 nm nm 0 0 nm
Exceptionals 0 0 0 nm nm 0 0 nm
Pretax 787 765 720 (5.9) (8.5) 1,532 1,485 (3.1)
Tax (193) (213) (188) (11.7) (2.6) (391) (401) 2.6
MI 0 0 0 nm nm 0 0 nm
Net profit 594 552 532 (3.6) (10.4) 1,141 1,084 (5.0)
Core net profit 401 552 532 (3.6) 32.7 1,141 1,084 (5.0)

Margins (%)
EBITDA 53.5 50.3 46.9 50.6 48.6
EBIT 37.2 37.9 35.5 36.1 36.6
Pretax 37.2 35.5 32.9 36.1 34.2
ETR 24.5 27.8 26.1 25.5 27.0
Net profit 28.1 25.7 24.3 26.9 25.0
Core net profit 19.0 25.7 24.3 26.9 25.0
Source: RHBRI

Table 3 : Key Statistics

FYE Dec 2Q09 1Q10 2Q10 qoq yoy Comments
(%) (%)
Subscribers (‘m)
- postpaid 2.73 2.71 2.69 (0.9) (1.5)
- prepaid 8.52 9.67 9.84 1.7 15.4 Thanks to robust growth in the youth segment.
- broadband 0.17 0.31 0.45 43.1 >100 Higher qoq on promotional packages.
- Total 11.25 12.38 12.52 1.2 11.3

Net adds (‘000)

- postpaid 73 0 (24) nm >100
- prepaid 64 351 169 (51.9) >100
- broadband 20 49 135 >100 >100
- Total 137 351 145 (58.7) 5.8

ARPU (RM)
- postpaid 103.5 102.0 103.0 1.0 (0.5) Higher qoq on a 0.8% increase in AMPU.
- prepaid 41.0 37.0 36.0 (2.7) (12.2)
- broadband 106.6 69.0 69.0 0.0 (35.3) Thanks to promotional package that sustained ARPU on qoq
basis.
- Blended 54.0 52.0 51.0 (1.9) (5.6)

AMPU (mins)
- postpaid 373 358 361 0.8 (3.2)
- prepaid 115 122 123 0.8 7.4
- Blended 175 173 173 0.0 (1.0)

Source: Company, RHBRI

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Table 4 : Earnings Forecasts Table 5 : Forecast Assumptions

FYE Dec (RMm) FY09PF FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 8,611.0 9,396.2 10,171.7 10,788.3 Subscribers (m)

- Postpaid 3.11 3.41 3.71
EBITDA 4,337.0 4,645.1 5,051.1 5,360.4 - Prepaid 9.72 10.07 10.37
EBITDA margin (%) 50.4 49.4 49.7 49.7 - Broadband 0.41 0.56 0.66
Total 13.24 14.04 14.74
Depn & amortisation (1,179.0) (1,264.9) (1,389.6) (1,462.1)
ARPU (RM)
EBIT 3,158.0 3,380.3 3,661.5 3,898.3 - Postpaid 103 104 104
EBIT margin (%) 36.7 36.0 36.0 36.1 - Prepaid 40 40 39
- Broadband 78 76 74
Net Interest (48.0) (238.5) (251.3) (226.3)
Associates 0.0 0.0 0.0 0.0 Capex (RMm) 1,400 1,300 1,200
EI (103.0) 0.0 0.0 0.0
Pretax Profit 3,007.0 3,141.7 3,410.3 3,672.0
Tax (775.0) (793.3) (861.1) (918.0)
Minorities 0.0 0.0 0.0 0.0
Net Profit 2,232.0 2,348.4 2,549.2 2,754.0
Core Net Profit 2,335.0 2,348.4 2,549.2 2,754.0
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

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Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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