Investment Highlights

• We maintain our HOLD recommendation on Maxis with a slightly higher DCF-derived fair value of RM5.76/share (from an earlier 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.

• We have slightly raised FY19F–FY21F earnings as Maxis' 9MFY19 normalised net profit of RM795mil came in a tad above our expectations – 81% of our earlier FY19F earnings vs. 72% for 1HFY18. As a comparison, 9MFY19 accounted for 85% of FY18 normalised earnings. The group declared a flat QoQ 3QFY19 dividend of 5 sen, which translates to an unchanged YoY 9MFY19 EPS of 15 sen, in line with our forecasts.

• As U Mobile contributed revenues of RM20mil in 3QFY19 and RM122mil in 9MFY19, Maxis is likely to continue to experience flattish 4QFY19 revenue as the wholesale arrangement has lapsed in June this year against management guiding for a mid single-digit normalised FY19F EBITDA decline.

• Maxis’ 9MFY19 net profit decreased 23% YoY due to a 4% service revenue drop in line with management’ guidance for an FY19F low single-digit service revenue decline. This stemmed largely from the lower U Mobile wholesale revenue for Maxis’ 3G radio access network, exacerbated by higher operating costs (+87%) driven mostly by traffic expenditures (+2.2x), staff (+71%), network (+33%), receivable impairments (+RM75mi) and spectrum fees (+82%).

• Sequentially, Maxis’ 3QFY19 normalised net profit slid by 8% QoQ to RM361mil also due to the lower contribution from U Mobile’s wholesale arrangement and higher traffic costs (+9%). QoQ, Maxis’ overall subscribers commendably rose by 141K QoQ as the 143K increase in postpaid users to 3.6mil was partly offset by a 2K decrease in prepaid segment to 7.5mil. This overall trend appears to be steady, as the group’s subscriber base has increased by 234K YoY.

• Likewise, average revenue per user (ARPU) has stabilised at RM51/month even though postpaid ARPU slid by RM1/month QoQ to RM85/month. Home fibre ARPU surprisingly rose RM2/month QoQ to RM108/month – 9% above the entry level package of RM99/month (including voice option).

• The group’s home connections further accelerated by 29K QoQ and 103K YoY to 305K while business connections surged from a low base by 5K QoQ and 23K YoY to 39K. Maxis HomeFibre’s recent bundling arrangement with Astro’s RM99 Family Pack+30Mbps fibre plan is likely to sustain this segment’s growing subscriber base. Management affirmed that these subscribers are not being subsidised by Maxis.

• While 9MFY19 capex rose 24% YoY to RM636mil on network capacity rollouts, this translates to only 11% of 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 4QFY19. We view the stock’s FY20F EV/EBITDA of 13x as on parity with its 3-year average, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 25 Oct 2019