Comments on Quarterly Results: MAXIS 2006Q3

Except for its Indonesian operation, which is still in its infancy, MAXIS fired on all cylinders this quarter. Revenue and profit before tax grew by 4.5% and 3.7% q-o-q, respectively. The major contributor to its profits is still the mobile phone operations in Malaysia. The number of suscribers grew by 4-5% compared to the previous quarter but most importantly, ARPU held up well. Its India operation, which will be its source of growth, performed admirably. The number of suscribers grew by an impressive 19% compared to the previous quarter while ARPU remained similar.

Its Indonesian operation is still in the red and I still believe that it will turn out to be a poor investment. It is almost impossible to start a new telco in a market where there are already a few dominant players. Just like TIMECOM, which will launch its 3G license in 2007, it is bound to fail. However, since I am valuing MAXIS based on PE, the Indonesian operation which does not contribute any earnings is basically contributing nothing to the valuation.

Why did I purchase MAXIS? Firstly, its valuation is undemanding. EPS for 2006 is expected to be about 78c. Forecasting a growth of 10% in 2007 will mean that EPS is expected to be about 86c. Based on its share price of $9.40, MAXIS is trading at a PE of just 11x. For a well managed company with good corporate governance, growth prospects and track record, I believe it should be valued at about 13x PE, giving it a target price of about $11.20.

Growth prospects is tremendous in India. Even in the saturated market of Malaysia, I believe it can still grow as it seems to me that there are only two companies out of the three that really mean business. Celcom is dying as it fails to capture the younger generation market. It may not seem that bad at the moment but once the older generation that has been Celcom suscribers for ages phases out, Celcom is in big trouble. In fact, with the number portability expected to be implemented next year, it could be earlier than expected as its suscribers switch to MAXIS and DIGI due to their superior plans, service and branding.

MAXIS' cash flow is also admirable. Just a few quarters after the huge acquisition of Aircel which landed it in debt and its huge capex for 3G and Indonesian operation, it is starting to turn into a net cash position again. This is despite distributing dividends of 58.35 cps annually. Based on a share price of $9.40, its dividend yield is a generous 6.2%.

At current valuation, MAXIS is definitely very attractive. However, investors must be prepared to be patient. You cant expect MAXIS to provide a 50% gain annually but its defensive qualities makes up for the small upside it provides. In other words, MAXIS provides a 'low risk, low gain' investment. If you want to have minimal exposure to risk and can be satisfied with 15-20% return each year, MAXIS would be a good investment.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.