Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Maxis with an unchanged DCF-derived fair value of RM5.20/share, based on a WACC discount rate of 6.4% and a terminal growth rate assumption of 2%, implying an FY19F EV/EBITDA of 13x and on par with its 3-year average.

• The group declared a 3QFY18 dividend of 5 sen, which leads to a flat YoY 9MFY18 DPS of 15 sen and a 77% payout, within our FY18F assumption of 76% vs. 68%-75% in FY16-FY17.

• Our forecasts are maintained as Maxis' 9MFY18 normalised net profit of RM1,508mil (-3% YoY) came in generally within expectations, accounting for 79% of both our FY18F earnings and 78% of street’s.

• Even though 9MFY15-1HFY17 represented a lower range of 71%-74% of FY15-FY17 normalised earnings, we expect a weaker 4QFY18 from the cessation of U Mobile’s leasing arrangement with Maxis’ 3G radio access network (RAN) on 27 Dec 2018. This is supported by management’s unchanged guidance for a high single-digit FY18F EBITDA decline vs. a normalised contraction of only 2% in 9MFY18.

• Maxis’ 3QFY18 normalised net profit rose 8% QoQ to RM518mil from a 1% revenue increase to RM2.3bil together with a 3% depreciation reduction and 5% decrease in traffic costs from the group’s contract renegotiations with suppliers.

• Sequentially, Maxis’ 3QFY18 service revenue edged up 0.7% from the 86K increase in postpaid subscribers to 3.1mil which was partly offset by the prepaid decline of 13K to 7.7mil, while blended average revenue per user (ARPU) was flat at RM53/month. The group’s postpaid share of service revenue has gradually risen to 55% in 3QFY18 from 48% in 1QFY17.

• All in, Maxis registered a second consecutive total subscriber gain of 73K QoQ against the backdrop of a contracting base since 2QFY15 which has led to a loss of 2.1mil customers from SIM consolidation amid intense competition.

• As Maxis’ 9MFY18 service revenue declined by 3%, Maxis maintains its cautious FY18F service revenue guidance of a mid-single-digit decline vs our assumption of -4%.

• Also, management indicated that 4QFY18 capex could sharply accelerate as 9MFY18 capex of RM514mil accounts for only 51% of Maxis’ unchanged guidance of RM1bil, which translates to FY17 capex/service revenue of 12%. This excludes spectrum payments, such as for the 2100MHz’s RM118mil price component and the upcoming 700MHz fees.

• Amid likely down-trading activities for lower priced home fibre packages at new higher speeds in an increasingly competitive fixed broadband market, we view the premium FY19F EV/EBITDA of 13x vs. its 3-year average of 12x as unjustified.

Source: AmInvest Research - 19 Oct 2018