Investment Highlights

• We maintain our HOLD recommendation on Maxis with an unchanged DCF-derived fair value of RM5.76/share, 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.

• After an analyst briefing later today, we expect to maintain our fine-tuned FY20F–FY22F earnings as Maxis' FY19 normalised net profit of RM1,500mil came in within our and street’s expectations. The group declared a flat QoQ 4QFY19 dividend of 5 sen, which translates to an in-line YoY FY19 EPS of 20 sen.

• While the 3G radio access network wholesale arrangement with U Mobile contributed revenues of RM15mil in 4QFY19 and RM138mil in FY19, progressive revenue decline from the contract which had lapsed in June 2019 will no longer significantly impact the group’s forward earnings. Hence, management is guiding for a “flat to low single-digit increase” for both FY20F service revenue and normalised EBITDA, in line with our existing assumptions.

• Maxis’ FY19 normalised net profit dipped 15% YoY due to a 5% service revenue fall, on the upper end of management guidance for an FY19 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 (+4%) driven mostly by traffic (+16%) and staff (+7%) costs.

• Sequentially, Maxis’ 4QFY19 normalised net profit slid by 5% QoQ to RM344mil also due to the lower contribution from U Mobile’s wholesale arrangement and higher traffic costs (+37%). QoQ, Maxis’ overall subscribers commendably rose by 88K QoQ as the 174K increase in postpaid users to 3.8mil was partly offset by an 86K drop in prepaid segment to 7.4mil. This overall trend appears to be steady, as the group’s subscriber base has increased by 369K YoY.

• Likewise, average revenue per user (ARPU) has stabilised at RM51/month even though postpaid ARPU slid by RM1/month QoQ to RM84/month. Home fibre ARPU rose RM1/month QoQ to RM109/month – 10% above the entry-level package of RM99/month (including voice option).

• The group’s home connections accelerated by 22K QoQ and 101K YoY to 327K while business connections climbed by 3K QoQ and 19K YoY to 42K. Maxis’ converged marketing strategy, coupled with HomeFibre’s bundling arrangement with Astro’s RM99 Family Pack+30Mbps fibre plan are likely to sustain this segment’s growing subscriber base.

• As guided earlier, 4QFY19 capex ramped up 2.4x QoQ to RM577mil, leading to an FY19 capex increase of 17% YoY to RM1,213mil, driven by network capacity rollouts. Translating to 15% of FY19 service revenue, this is within expectations given the group’s base capex guidance of RM1bil. The stock’s FY20F EV/EBITDA of 13x is currently on parity with its 3-year average, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 20 Feb 2020