Published on 26 Jan 2022.
RAM Ratings has reaffirmed the AA3/Stable rating of BGSM Management Sdn Bhd’s (the Group) IMTN Programme of up to RM10 bil in nominal value (2013/2043).
The rating is premised on the well-established position of the Group’s ultimate subsidiary – Maxis Berhad (the Company) – in the Malaysian mobile services industry, backed by its strong operational and financial performance. We also factor in the IMTN’s structural subordination to Maxis’ considerable priority debts.
As Malaysia’s leading mobile operator, Maxis held the largest share of the Big Three’s (Maxis, Digi and Celcom) collective revenue (41.2%) and operating profit before depreciation, interest and tax (OPBDIT) (40.6%) in 9M 2021. Maxis’ operational performance stayed resilient, leading the market with 11.44 mil mobile subscriptions as at end-September 2021 (+4.0% y-o-y). Maxis’ continuous prepaid-to-postpaid migration effort and bundling strategy resulted in respective 2.6% and 6.5% y-o-y gains in prepaid and postpaid subscriptions, sustaining the Company’s subscriber base amid the challenging mobile landscape.
The proposed Digi-Celcom merger however is expected to disrupt Maxis’ pole position when finalised. An enlarged industry rival will potentially in the long run have the upper hand to compete on mobile pricing, but anticipated synergies and economies of scale could take time to achieve. Though potentially disadvantaged by the economies of scale and lower cost base as promised by the merger in the longer term, we expect Maxis to ride on its strong network quality, innovative bundling strategy and converged solutions to differentiate and compete in the saturated mobile segment.
Maxis’ blended average revenue per user (ARPU) remains the highest of the Big Three at RM47 (industry average: RM45) but has declined over the years due to a competitive pricing environment and industry-wide reduction in mobile termination rates in 2019 and 2020. As such, the Company’s top line for 9M FY Dec 2021 inched up just 0.7% y-o-y to RM6.76 bil in spite of a larger subscriber base. Apart from its core mobile business (+0.4%), the fibre and enterprise services segments recorded revenue growth of 23.1% and 1.2%, respectively, in the same period. Maxis’ OPBDIT margin improved to 40.3% (fiscal 2020: 38.6%) in view of cost saving and productivity management initiatives.
BGSM Management’s bottom line returned to the black for FY Dec 2020 (net profit: RM1.07 bil) after the previous year’s one-off non-cash goodwill impairment of RM2.38 bil resulted in a RM1.20 bil net loss. Gearing and funds from operations debt coverage (FFODC) were a better 0.42 times and 0.30 times, respectively (fiscal 2019: 0.43 times and 0.27 times), after debts were gradually pared down to RM12.95 bil as at end-December 2020 (end-December 2019: RM13.25 bil).
Based on our stressed scenario which assumes an average 1.5% y-o-y drop in Maxis’ revenue, an OPBDIT margin of 39.0% and an average debt level of RM13.10 bil, we expect the Group’s FFODC to average 0.22 times in the next three years, well within the rating threshold. The fibre and enterprise businesses will be Maxis’ growth driver in the long run, cushioning the Company in the competitive and saturated mobile business.
Given the uncertainties over the deployment method of 5G at this juncture, we expect the mobile players to place their focus on improving 4G network quality and coverage, which is the agenda of the government’s ongoing Jendela initiative. We expect Maxis to spend circa RM3.20 bil over the next three years to strengthen its core 4G capacity, whilst continuing to expand its fibre and enterprise segments. Tapping on Maxis’ first mover advantage, both segments have experienced substantial growth over the past three years (averaging 22.4% and 30.4%, respectively) and constituted a combined 14.0% of the Company’s service revenue in 9M FY Dec 2021 (9M FY Dec 2020: 12.8%).
Yip Chee Meng
(603) 3385 2516
Chong Van Nee, CFA
(603) 3385 2482
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