Maxis 1Q18- TA Securities

Maxis reported 1QFY18 core net profit of RM510mn (-1.9% QoQ, unchanged YoY). This was within ours and consensus estimates at 25.9% and 25.7% respectively. An unchanged first interim dividend of 5.0sen/share was declared, representing a payout ratio of 74.6%.

1QFY18’s service revenue declined by 2.8% QoQ and 4.6% YoY – in line with guidance – mainly on the prepaid segment’s weakness. Recording its 11th consecutive quarter of net churns (-278k QoQ), the segment continued to struggle with price-focused competition, SIM consolidation and prepaid to postpaid migration. Management highlighted that arresting the segment’s sustained service revenue decline (-6.0% QoQ, -15.6% YoY) has been one of its priorities. Positively, reception to Hotlink RED, the segment’s new flagship product launched during the quarter, has been encouraging thus far.

Meanwhile, the postpaid segment’s performance remained uninspiring. Its service revenue declined marginally by 0.9% QoQ (+5.2% YoY) due to seasonality (i.e. shorter number of days and lower roaming revenue). Also, despite recording its 7th consecutive quarter of net adds (+64k QoQ), driven by MaxisONE Plan subscribers, ARPU declined by 4.2% QoQ and 4.2% YoY to RM92/month. This was due to the increase in shared lines acquisitions and entry level postpaid subscribers (i.e. via Hotlink Postpaid FLEX). Management affirmed that with sustained traction from these areas, there is further downside to ARPU.

To draw comparison, Digi exhibited similar subscriber trends during the quarter with net churns in the prepaid segment (-80k QoQ) and net adds in the postpaid segment (+91k QoQ). However, its postpaid segment fared better with 6 consecutive quarters of consistent net adds and stable ARPU (-1.3% QoQ and -2.5% YoY).
At the bottom line, core net profit was flattish (-1.9% QoQ, unchanged YoY) as stronger margins from continued cost optimisation initiatives cushioned the decline in service revenue. Led by lower direct costs and operation and maintenance costs, EBITDA margins expanded 1.1pp QoQ and 3.1pp YoY to 45.7%.

Upon performing housekeeping to our model, our FY18/FY19/FY20 earnings estimates are adjusted marginally by -1.2%/-1.1%/-0.8% to RM1,944mn/RM1,934mn/RM2,001mn.

The underlying basis for management’s previous guidance was maintained. However, if based on MFRS15, expectations are for FY18’s service revenue to decline by mid-single digit (previously low-single digit) and EBITDA to decline by high-single digit (previously mid-single digit).

Expectations for base capital expenditure (~RM1.0bn) and free cash flow (close to FY17’s level) to be close to FY17’s levels were maintained. Meanwhile, efforts are being undertaken to growing enterprise and broadband contributions but management alluded that it would be more visible in the medium term.

To date, the group possesses a leading network. It has the largest 4G LTE population coverage at 92% and according to OpenSignal’s recent findings, Maxis takes the lead against its peers in the space of 4G and overall download speeds. That said, our concerns surround challenges to defend its position as risks prevail from the narrowing of network quality gaps. Recall that reallocation of the lower band 900MHz spectrum with Digi and U Mobile gaining increased access has resulted in a more equitable spectrum footprint. And in the meantime, Celcom has targets to be on par with peers in terms of 4G population coverage.

We value Maxis at a lower TP of RM5.95share – based on a DCF valuation with WACC of 7.0% and long-term growth rate of 1.0%. Premised on the group’s flattish outlook and average dividend yields of 3.3%, we reiterate our SELL recommendation on the stock. The ability to maintain its premium pricing remains a key risk.

Maxis 1Q18- TA Securities 1
Maxis 1Q18- TA Securities 2
Maxis 1Q18- TA Securities 3
Maxis 1Q18- TA Securities 4
Maxis 1Q18- TA Securities 5