TA Securities: Maxis 1Q19

Maxis’ 1QFY19 core net profit of RM404mn (+56.0% QoQ, -20.8% YoY) came within ours and consensus estimates at 24.7% and 24.2% respectively. The strong QoQ growth in earnings followed lumpy expenses of ~RM250mn incurred in 4QFY18 for the home fibre segment, enterprise business growth opportunities, network improvement and optimisation, and productivity programmes. Meanwhile, despite the YoY decline in earnings, dividend quantum was maintained with a 1st interim dividend of 5.0sen/share declared, representing a payout ratio of 96.2% – in line with the group’s target of at least 75%.

Overall, the group’s core mobile business remains challenging with 1QFY19 service revenue and normalised EBITDA respectively down 1.7% YoY to RM1,947mn and 6.6% YoY to RM953mn – in line with management’s guidance for a low-single digit decline in service revenue and mid-single digit decline in EBITDA.

The weaker performance was due to: 1) lower wholesale revenue largely arising from the complete termination of U Mobile’s 3G radio access network (RAN) sharing alliance agreement on 27 December 2018, 2) the 33% reduction in mobile termination rates effective 1 January 2019, and 3) continued net churns from the prepaid segment on the back of SIM consolidation and prepaid to postpaid migration. If excluding contributions from wholesale revenue, service revenue would be marginally higher 0.9% YoY to RM1,876mn.

Sequentially, service revenue declined 4.9% QoQ due to the factors as aforementioned as well as seasonality. Nevertheless, overall subscriber base was well defended with postpaid net adds of 131k QoQ offsetting prepaid net churns of 127k QoQ. This was driven by the postpaid segment’s entry level propositions (Hotlink Postpaid Flex and FLEX PLUS), which supported prepaid to postpaid migration. Meanwhile, the home fibre sustained its traction with net adds of 25k QoQ to 251k.

As for ARPU, postpaid ARPU at RM88/month was lower 6.4% QoQ and 4.3% YoY due to the growing mix of budget conscious subscribers while prepaid ARPU at RM35/month was lower 5.4% QoQ due to seasonality but unchanged YoY at RM35/month supported by the employment of bigdata analytics.

In terms of profitability, normalised EBITDA margins inched down 3.4pp YoY to 42.3% despite the adoption of MFRS 16 due to lower wholesale revenue and higher expenses, mainly in the area of operations and maintenance related to productivity programmes.

Outlook
For FY19, management reiterated its guidance for service revenue to decline by low-single digit (versus mid-single digit decline in FY18) and normalised EBITDA to decline by mid-single digit (versus high-single digit decline in FY18). This is mainly due to the absence of contributions from the group’s 3G RAN sharing alliance agreement with U Mobile as aforementioned. Note that the 3G RAN sharing alliance agreement accounted for 3% of Maxis’ FY15 and FY16 revenue or ~RM258mn.

Recall that to drive service revenue growth in the face of challenges from the mobile market, the group has recently embarked on a 5-year (20182023) strategy which involves capturing opportunities from enterprises via the offering of converged solutions in underpenetrated areas such as fixed connectivity, managed services, cloud services, and IoT solutions which combined is an addressable ICT market with an estimated market size of RM20bn to RM25bn.

Via the 5-year strategy, the group aims to transform from a ‘consumer and mobile-centric telco’ to ‘Malaysia’s leading converged communications and digital services company’. Convergence will be a differentiation factor to support customer retention and future growth. Internal targets are for service revenue to exceed RM10bn (FY18: RM8.1bn) by 2023. While we are positive on management’s efforts, we estimate low-single digit service revenue growth of 0.9%/1.0% in FY20/FY21 until meaningful traction is observed. Furthermore, while Maxis’ leadership in mobile connectivity would support its ambitions, we note that the group could face competition from peers like Celcom and Digi as they are on a similar bandwagon to capture growth from the enterprise segment.

Meanwhile, CAPEX guidance was maintained with core network CAPEX at RM1.0bn (unchanged from FY18) and growth CAPEX at RM1.0bn over 3 years to support the aforementioned 5-year strategy while operating free cash flow was also maintained to be in line with FY18’s.

Valuation
Upon rolling forward base year valuation to CY20, our TP for Maxis is raised to RM4.75/share (previously RM4.50/share) based on DCF valuation with a WACC of 7.6% and LT growth rate of 1.0%. Reiterate Sell. Our bearish stance on the stock is premised on subdued earnings outlook in the near-term and unexciting forward dividend yields of 3.7% across FY19-FY21. Upside risks include strong traction with the group’s new 5-year strategy. While downside risks include heightened price competition and regulatory changes.

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