Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Maxis with a lower DCF-derived fair value of RM4.75/share (from an earlier 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.

• We have lowered FY19F-FY20F earnings by 9%-16% as Maxis' FY18 normalised net profit of RM1,767mil (-16% YoY) came in below expectations – 7% and 9% below our and street’s estimates respectively.

• The results included a RM250mil one-off cost for the marketing launch of fibre customer retention, mobilsation of enterprise business growth, network improvement and optimisation, and operating and maintenance expenses for productivity initiatives. However, we caution that some of these costs may recur in FY19F.

• The group declared a 4QFY18 dividend of 5 sen, which leads to a flat YoY FY18 DPS of 20 sen and an 88% payout, above our FY18F assumption of 76%.

• Maxis is moving from a consumer/mobile-centric telco to a converged digital solutions provider, similar to TM’s quadplay agenda over the past 5 years. However, we expect lower margins from these investments given that incumbents are already offering fibre packages while new operators may emerge.

• For FY19F, management is guiding for low single-digit service revenue decline which will lead to mid-single digit EBITDA contraction. However, management expects to maintain base capex at RM1bil while investing an additional RM1bil over 3 years in fiberised solutions, digitalisation and productivity capabilities.

• By effectively raising capex by 33%, the expected higher depreciation will translate to a FY19F–FY20F net profit decline of 8%–9%. We introduce FY21F with a flattish earnings trajectory given the higher depreciation base. Note that the increased capex guidance excludes additional spectrum payments, such as the upcoming 700MHz band.

• The group’s focus in high-value customers has seen its postpaid share of service revenue gradually rising to 55% in FY18 from 52% in 1QFY17. Maxis’ 4QFY18 service revenue rose 1% as the decline in prepaid was more than offset by the postpaid segment. Against a flattish blended average revenue per user (ARPU) of RM53/month, 4QFY18 postpaid customers climbed 85K QoQ to 3.2mil while prepaid dropped 132K QoQ to 7.6mil.

• Even though Maxis’ 4QFY18 revenue rose 8% QoQ driven by higher device sales, its normalised net profit halved QoQ to RM259mil from the one-off increase in costs together with a 17% increase in depreciation charge and a 2.7ppts increase in effective tax rate.

• However, as dividends are likely to be compressed against the group’s rising capex targets amid high net debt/EBITDA of 1.9x, we view the premium FY19F EV/EBITDA of 14x vs. its 3-year average of 12x as unjustified.

Source: AmInvest Research - 18 Feb 2019