Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Maxis with an unchanged DCF-derived fair value of RM4.60share, based on a WACC discount rate of 6.4% and terminal growth rate assumption of 2%, implying an FY19F EV/EBITDA of 13x and on par with its 3-year average.

• We maintain FY19F–FY21F earnings as Maxis' 1QFY19 normalised net profit of RM404mil came within our expectations – 29% of our FY19F earnings, similar to 1QFY18 compared with FY18. However, we view the results as below street’s FY19F mean net profit, which is 16% above our forecast. The group declared a flat 1QFY19 dividend of 5 sen, which translates to a 96% payout and in line with our FY19F assumption.

• As a foreshadow for the full year, Maxis’ 1QFY19 net profit decreased 21% YoY due to a 2% service revenue decline which stemmed partly from a RM49mil fall in U Mobile’s wholesale revenue for Maxis’ 3G radio access network, 20% interest cost increase and 5% rise in operating costs, driven by operation & maintenance (O&M) (+36%), traffic (+2%), staff (+9%) and higher provision for doubtful debts (+22%).

• Sequentially, Maxis’ 1QFY19 net profit rebounded by 56% QoQ mainly from the absence of most of the RM250mil one-off expenses for fibre customer retention, mobilisation of enterprise business growth, network improvement, optimisation and O&M charges for productivity initiatives which were incurred in 4QFY18.

• QoQ, Maxis’ overall subscriber commendably rose by 4K, as the 131K increase in postpaid users more than offset the 127K decline in the postpaid segment. This overall trend appears to be stabilising, as the group’s subscriber base has increased by 51K YoY.

• However, postpaid average revenue per user (ARPU) has fallen by RM2/month QoQ to RM51/month, driven by postpaid decreasing by RM6/month and prepaid by RM2/month.

• Capex, in which 1Q tends to be the lowest quarter, has risen by 19% YoY to RM127mil. Underpinning the group’s drive towards converged fiberised solutions for enterprise, business and residential segments, the group’s home connections have risen by 25K QoQ and 67k YoY to 251k.

• For FY19F, management maintains its guidance for a low singledigit service revenue decline which will lead to mid-single-digit EBITDA contraction and base capex at RM1bil while investing an additional RM1bil over 3 years in fiberised solutions, digitalisation and productivity capabilities. Note that the increased capex guidance excludes additional spectrum payments, such as the upcoming 700MHz band.

• As U Mobile contributed RM71mil wholesale revenue in 1QFY19, Maxis is likely to continue to experience further income loss until June this year amid rising capex targets and high net debt/EBITDA of 1.9x. Hence, the premium FY19F EV/EBITDA of 14x vs. its 3-year average of 12x is unjustified.

Source: AmInvest Research - 26 Apr 2019