BEATING prospectus. Maxis (RM5.40) beat its 2002 prospectus forecasts at turnover, pre-tax and net profit levels, by respectable margins, as shown below.
Against our more optimistic forecasts, net profit was still 10% ahead. As we see it, the results are impressive not only relative to its prospectus indication, but also against the tough industry conditions, and especially considering the poor showing of some of its peers.
Building on quality. Indeed, investors spooked by the sharp turnover decline at Celcom (RM2.50) between July-September and October-December 2002 would be pleased to see the positive 6% growth at Maxis, in tandem with the expansion in subscriber base.
After a relatively slower addition of 158,000 subscribers (net basis) in the preceding quarter, Maxis regained momentum as it brought in an additional 171,000 subscribers in October-December 2002.
We also note an encouraging increase in the average revenue of post-paid customers, while other yardsticks including bad debt and churn (industry speak for network switching) remained well under control. Profit wise, lower depreciation and reduced financing costs post-listing more than offset a slight easing in operating margin, boosting sequential pre-tax growth to 17%.
Superior growth well surpassing industry. For the full year, Maxis expanded its market share from 31% to 34% while maintaining average subscriber revenue. As fixed costs are spread over a higher revenue base, greater economies of scale lifted operating margin from 46% in 2001 to 50% in 2002, driving both pre-tax and net profit about 60% higher.
Not only did Maxis widen its leadership, it also retained the highest average revenue subscriber with the lowest churn and bad debt.
Tip of the iceberg? Going forward, we expect Maxis to continue to deliver above-industry growth as it rides with its quality users. With voice communication entering maturity phase, data would be the way to go for the next leg of cellular expansion, and here, we see Maxis as among the best positioned to capitalise on the opportunities.
As an indication of the potential, Maxis’ SMS (just the tip of the iceberg as far as data communications goes) volume grew 20% between the two latest quarters, translating to an exponential 215% surge for the full year. From 3% in 2001, mobile data revenue as proportion of total revenue has jumped to 7% in 2002, ending at a high 9% in the 4th quarter.
Dividend to boost! Together with the good results, Maxis sprang a pleasant surprise by announcing a net dividend of 15 sen per share, providing a respectable 2.8% net yield for shareholders. This may not be exceptional in these days of rising dividends, but is certainly a pleasant surprise, especially in the telecommunications sector.
With RM1.12bil net cash at end-2002 (RM1.85bil gross), Maxis is in the position to be generous. The dividend will be paid in two tranches; the first 6 sen per share going ex on Mar 17 to be paid on Apr 7, while the next 9 sen per share will come later upon shareholders’ approval.
Upgrade to BUY. We have always maintained that Maxis is the preferred Malaysian telecommunication exposure and have not been disappointed. As it expects to complete the acquisition of TimeCel in mid-2003, it may be realistic to assume a more moderate growth pace this year, but what’s important is that Maxis can be relied on to consistently out-perform the industry on its quality subscriber base and brandname, helmed by a proven team which has delivered well.
While there is inevitably uncertainties associated with the new assets, we believe that potential earnings dilution from TimeCel would be fairly limited, if at all.
Based on our revised numbers, we have raised our discounted cashflow valuation for Maxis to RM6.20 per share. Meanwhile, 2003 earnings per share of 44 sen puts the stock at just above 12 times price-earnings ratio (lowest in sector), with added attraction on the dividend front (2.8% 2002 net yield being the highest in sector).
Overall, we see a compelling investment opportunity with earnings growth, cashflows, balance sheet and dividend expected to surpass peers. While the potential 15% upside from fair value may not seem the most exciting, its ability to consistently out-perform and its good trading liquidity are likely to earn it a good premium above fair value over time. Upgrade Maxis to BUY.
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