Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Maxis with a lower DCF-derived fair value of RM4.60/share (from an earlier RM4.70/share), based on a WACC discount rate of 6.4% and a terminal growth rate assumption of 2%. The revised FV implies an FY19F EV/EBITDA of 12x and is on par with its 3-year average.

• We have lowered FY19F net profit by 11% from the upcoming fullyear revenue loss of RM90mil/quarter from the cessation of U Mobile’s leasing arrangement with Maxis’ 3G radio access network (RAN) on 27 Dec 2018. Our FY20F–FY21F earnings have only been marginally adjusted as our assumptions are largely unchanged. Following our changes, our FY19F–FY21F earnings forecasts are now 14%–16% below consensus.

• However, we have raised our FY19F–FY21F DPS by 16%–30% to a YoY flattish 20 sen, as management has affirmed that its FY19F operating cash flow is expected to be stable this year on expectations that Maxis’ programme to reduce working capital is expected to offset its lower earnings impact. This means that the group’s FY19F–FY20F dividend payout ratio is likely to rise slightly above 100% vs. 88% in FY18.

• With a flattish base capex of RM1bil annually, Maxis’ plan to invest an additional RM1bil over 3 years in fiberised solutions, digitalisation and productivity capabilities could be back-loaded towards the later years.

• These capex programmes exclude increased spending for the 700MHz spectrum, which could cost up to RM431mil for 2 blocks of 2 x 5MHz bands. However, management is confident of securing external financing even with FY19F net debt/EBITDA reaching 2.1x.

• Maxis is moving from a consumer/mobile-centric telco to a converged communications & digital solutions provider, similar to TM’s quadplay agenda over the past 5 years. As the telco that has been offering mobile and fibre connectivity over the past years, Maxis hopes to penetrate the enterprise business segment with an eye on managed/cloud services and IoT solutions.

• Recall that Maxis’ 4QFY18 results included RM250mil additional costs for the marketing launch of fibre customer retention, mobilisation of enterprise business growth, network improvement and optimisation and operation and maintenance expenses for productivity initiatives.

• Amid moderating mobile competition, the group’s bread-andbutter cellular earnings are expected to continue being resilient with Maxis’s postpaid share of service revenue gradually rising to 55% in 4QFY18 from 52% in 1QFY17. Maxis’ 4QFY18 service revenue rose 1% as the decline in prepaid was more than offset by the postpaid segment.

• With the upcoming 1QFY19 results likely to be weak due to the lingering impact from U Mobile revenue loss, we view the premium FY19F EV/EBITDA of 14x vs. its 3-year average of 12x as unjustified.

Source: AmInvest Research - 22 Mar 2019