Investment Highlights

• We maintain our HOLD recommendation on Maxis with an unchanged DCF-derived fair value of RM5.60share, based on a WACC discount rate of 6.3% and terminal growth rate assumption of 2%. This implies an FY20F EV/EBITDA of 13x and is on par with its 3-year average.

• As we have indicated earlier today, we maintain FY19F–FY21F earnings as Maxis' 1HFY19 normalised net profit of RM795mil came within our expectations – 55% of our FY19F earnings vs. 56% for 1HFY18 compared with FY18. However, we view the results as below street’s FY19F mean net profit, which is 14% above our forecast.

• The group declared a flat QoQ 1QFY19 dividend of 5 sen, which translates to a 2.8 sen YoY decline in 1HFY19 DPS to 12.8 sen, in line with our FY19F assumption.

• As U Mobile contributed RM71mil wholesale revenue in 1QFY19 and RM31mil wholesale revenue in 2QFY19, Maxis is likely to continue to experience further income loss in 3QFY19 as the arrangement has lapsed in June this year amid rising capex rollouts and a high net debt/EBITDA of 1.9x.

• As a foreshadow for the full year, Maxis’ 1HFY19 net profit decreased 20% YoY due to a 3% service revenue decline which stemmed largely from a RM130mil fall in U Mobile’s wholesale revenue for Maxis’ 3G radio access network. This was partly offset by higher traffic costs (+3%) and spectrum fees (+4%).

• Sequentially, Maxis’ 2QFY19 normalised net profit slid by 3% QoQ to RM391mil mainly from the RM40mil revenue decline from U Mobile’s progressive wholesale arrangement termination.

• QoQ, Maxis’ revenue-generating subscribers (RGS30) commendably rose by 59K QoQ as the 109K rise in postpaid users to 3.4mil was partly offset by a 50K drop in its prepaid segment to 6.4mil. This overall trend appears to be steady, as the group’s subscriber base has expanded by 56K YoY.

• Likewise, average revenue per user (ARPU) has stabilised at RM51/month even though postpaid ARPU fell by RM2/month QoQ to RM86/monthh. Home fibre ARPU, detailed for the first time, was flattish QoQ at RM106/month – 7% above the entry level package of RM99/month (including voice option).

• The group’s home connections have risen by 25K QoQ and 82K YoY to 276K while business connections surged from a low base by 5K QoQ and 19K YoY to 34K. While 1HFY19 capex rose 24% YoY to RM394mil on network capacity rollouts, this translates to only 10% to service revenue vs. our assumption of 15%. As this is below management’s guidance for a base capex of RM1bil, we expect a ramp-up in 2HFY19.

• We view the stock’s FY20F EV/EBITDA of 14x as slightly pricey vs. its 3-year average of 13x, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 2 Aug 2019