• According to Bloomberg, Maxis may be exploring to buy out UMobile to help it expand in Malaysia.

• We think the likelihood of Maxis acquiring UMobile is low. We reckon that there may be financial constraints due to the high acquisition price. As Maxis will be investing in 5G, its funds may be stretched. In addition, the acquisition may not receive regulatory approval as it would result in a duopoly with two huge mobile network players in the industry vs. three giants currently, namely CelcomDigi, Maxis and UMobile.

• Maxis and other key mobile network operators (MNOs) are working to complete application package (AIP) submissions for the second 5G wholesale operator by 3Q2024. The name of the second network provider will be announced in 4Q2024.

• We are neutral on Maxis’ proposed acquisition of UMobile, if any. UMobile's FY23 financial performance is undisclosed as it is not listed. However, based on channel checks, investors had allocated more than RM5bil towards its growth.

• If UMobile’s acquisition price is RM10bil as reported, the price would make up 37% of Maxis current market cap of RM27bil. Assuming a debt and equity funding ratio of 50/50, the additional RM5bil debt will raise Maxis’ FY24F net debt-to-EBITDA to 3.5x from 2.2x. Maxis may also need to carry out a cash call.

• The significant financial resources directed towards the acquisition would strain cash flow and limit the funds available for crucial 5G infrastructure investments. This could delay Maxis's 5G development and its competitive positioning in the market.

• Additionally, we think the regulators might scrutinise the deal as it may lead to less competition in the market. In FY23, UMobile was the third largest telco with 18% market share, trailing behind Maxis’ 27% market share. Post-acquisition, Maxis will boast a market share of 45%, edging closer to CelcomDigi’s share of 47%.

• Valuation-wise, Maxis is currently trading at a FY24F EV/EBITDA of 9.1x, which is slightly below the 5- year average of 11x. We believe that this is fair due to the uncertainties in 5G dual network deployment, which could constrain Maxis’ long-term earnings growth. Maxis FY24F dividend yield is decent at 4.6%.

• We maintain HOLD on Maxis with an unchanged fair value of RM3.90/share (WACC: 8.1% & TG: 2%). Our fair value implies a FY24F EV/EBITDA of 10x, which is - 1SD below the 5-year mean of 11x.

Source: AmInvest Research - 17 Jul 2024