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Sunday 22 December 2013

2013-12-22 [ ][ ] Maxis’ latest earnings stretch valuations

source: [Talk About Share Market]

Maxis’ latest earnings stretch valuations

MAXIS’ valuations are expected to remain stretched following the company’s latest earnings for the third quarter ended September of 2013 financial year (3QFY13), which was below market consensus. Even though the poorer-than-expected results were due primarily to one-off staff separation costs of RM102 million, its underlying earnings remain tepid.

For the first nine months (9M) of FY13, net profit totalled RM1.475 billion, a fraction lower than the RM1.478 billion for the previous corresponding period.

While total revenue was up 3% for 9MFY13, the important service revenue was up only 1.9% over the same period. Strong growth in data revenue was partially offset by the persistent and gradual decline in voice and SMS revenue.

Top line growth still below industry average
In view of the results for the year-to-date, Maxis has lowered its guidance on revenue growth for the full year to around 2%, from the earlier forecast of about 5%. This means the company’s revenue growth will remain below the industry average, as it has for the past few years.

By comparison, DiGi.Com Bhd reported a good set of 3Q numbers, released late last month. Net profit was up 20.5% year-on-year (y-o-y) to RM1.16 billion for 9MFY13 from RM960 million in the previous corresponding period, boosted in part by lower accelerated depreciation. But underlying earnings too improved.

Revenue growth picked up pace in 3Q, rising 7.4% y-o-y, which boosted total revenue for 9MFY13 by 5.7% over the previous corresponding period. Service revenue, excluding device sales, was up 3.5% during this period, led by a double digit increase in data revenue while voice revenue, unsurprisingly, declined.

DiGi gaining market share
Notably, DiGi’s subscribers numbered 10.83 million, up from 10.49 million as at end-2012. Maxis, on the other hand, lost some customers. Mobile subscribers totalled 13.21 million as at end-September, down from 14.09 million at the end of last year.

Arguably, DiGi was always going to have the edge. It has a smaller subscriber base and as the company expands coverage and areas of service it should gain market share. Its pricing is competitive, catering for the mass market.

Unsurprisingly, DiGi’s stronghold is in the pre-paid segment, where demand is more price sensitive. The company also had success in focusing on the cheaper range of smartphones in the past months, in tune with the increasing proliferation of mobile Internet usage.

Fair chance of a shake-up

This could remain the trend going forward — or Maxis’ new CEO, also former CEO at DiGi, could shake up this scenario.

Maxis intends to regain lost ground — particularly in the pre-paid segment — starting with new pricing plans for data, which is the key driver of growth for the foreseeable future. Of note, there were also hints of a change in strategy with respect to the company’s dividend policy and fibre broadband business. More details are to be revealed in December.

The home fibre broadband business has been slow to take off, even after the tie-up with sister company, Astro Malaysia Holdings Bhd. The unit remains loss-making.

Meanwhile, we had previously highlighted that Maxis’ annual dividend payment of 40 sen per share, exceeding its yearly profit, is unsustainable for the long term, unless earnings regain positive traction. Total borrowings have been trending higher over the past few years. This would be more burdensome when interest rates start to go up next year, as they are widely expected to.

Are premium valuations sustainable?

Based on our earnings forecast, Maxis is currently trading at higher price-earnings ratios than peers DiGi, Axiata and Telekom Malaysia Bhd — sustained, in no small part, by its higher than average dividend yields. Assuming a 40 sen per share payout, shareholders will earn a net yield of 5.6% at the current price.

However, should dividends come off next year, there will be increasing pressure for earnings growth to pick up momentum if it is to maintain the current premium valuations.

Maxis’ prevailing valuations are also higher than Singapore-listed telcos, SingTel, Starhub and M1.

Like the domestic operators, Singapore telcos too are facing intense competition amid market saturation — mobile penetration rate stands at over 156%. To cope with the transition from voice-SMS to an increasingly data-centric usage, the telcos have adopted tiered pricing for data plans as opposed to unlimited packages.

M1, the smallest of the three in terms of market capitalisation, seems to be faring the best under the new strategy — reporting 6.1% service revenue growth in the first three quarters of 2013. Net profit saw an outsized 10.2% improvement to S$119.7 million (RM307.5 million) over the same period. This was attributed, in part, to more customers migrating to tiered data plans — now about 32% of total post-paid customers — that were launched back in September 2012.

Starhub, on the other hand, guided revenue growth lower after tepid earnings results for the latest quarter. Service revenue growth is now expected to be flattish for the full year — although earnings fared better, growing 5.8% to S$287.1 million for 9MFY13.

SingTel, on the other hand, is expecting revenue to contract in the mid single digits for the current financial year ending March 2014. This is due, in part, to difficult operating conditions in Australia, compounded by weakness in the Aussie dollar. Mobile revenue in Singapore is expected to grow by the low single digits. The company is also guiding for lower earnings, which are further dampened by currency depreciation for key associates, including the rupiah and rupee.

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